1. What Is a Cash Flow Projection?
A cash flow projection is a financial forecast showing how much cash your small business expects to receive and spend over a specific period. It helps predict liquidity, manage expenses, and ensure financial stability.
2. Why Is a Cash Flow Projection Important?
- Prevents cash shortages by forecasting gaps
- Improves financial decision-making
- Helps secure loans and investments
- Keeps your business compliant with HMRC obligations
- Assists in planning for growth, hiring, and purchasing
3. Key Elements of a Cash Flow Projection
- Opening Balance: Cash available at the start of the period
- Cash Inflows: Sales revenue, loan income, grants, VAT refunds
- Cash Outflows: Rent, salaries, stock, marketing, taxes, utilities
- Net Cash Flow: Inflows minus outflows
- Closing Balance: Cash left at the end of the period
4. Time Periods for Cash Flow Projections
Most small businesses project:
- Monthly for day-to-day management
- Quarterly for short-term planning
- Annually for long-term strategy
Update the forecast monthly to stay aligned with reality.
5. How to Build a Cash Flow Projection (Step-by-Step)
- Choose a period (e.g., 12 months, broken into months)
- Estimate income sources (sales, grants, etc.)
- List expenses (fixed and variable)
- Calculate monthly totals for income and expenses
- Determine net cash flow (Income – Expenses)
- Track running cash balance each month
- Update regularly based on actual performance
6. Tools for Creating Cash Flow Projections
- Excel or Google Sheets – Custom and free
- Xero and QuickBooks – Include forecasting features
- Float – Visual cash flow tool for small businesses
- FreeAgent – Ideal for UK freelancers and microbusinesses
7. Common Mistakes to Avoid
- Overestimating income
- Underestimating expenses
- Ignoring seasonality
- Failing to include VAT obligations
- Not accounting for slow-paying clients
- Forgetting to update with actual results
8. Sample Cash Flow Projection Overview
Month 1 Example:
- Opening Balance: £2,000
- Cash Inflows: £5,000 (Sales + VAT refund)
- Cash Outflows: £4,200 (Rent, salaries, stock)
- Net Cash Flow: +£800
- Closing Balance: £2,800
Repeat this structure monthly.
Frequently Asked Questions
1. Do I need a cash flow projection to apply for a loan?
Yes, most lenders (including the UK Start Up Loans scheme) require it.
2. What’s the difference between profit and cash flow?
Profit shows earnings after expenses; cash flow tracks actual money moving in and out.
3. Can I use software to automate my forecast?
Absolutely. Tools like Float and Xero can integrate with your accounts and update automatically.
4. How far ahead should I forecast?
12 months is standard, but 3–6 months is good for short-term insight.
5. Do I include VAT in my projection?
Yes—include VAT paid and received to reflect actual cash movement.
6. What if I project a cash shortfall?
Plan ahead: reduce costs, increase sales, or secure funding before the gap occurs.
Conclusion
Creating a small business cash flow projection is one of the most important financial habits you can develop. It empowers you to make smarter choices, avoid cash crunches, and keep your business on solid ground in 2025. Use a simple spreadsheet or software tool and review it monthly for maximum benefit.