A 12-month cash flow forecast starts from the current balance of every bank account, then adds, month by month, the money expected to come in, mainly invoices still to be collected, and subtracts the money expected to go out, such as supplier invoices, VAT, salaries and other regular payments. Overdue amounts sit on a separate line, outside the forecast balance, and the forecast is reviewed every month against what actually happened.
The question behind it is nearly always the same. Will there be enough money to pay salaries, taxes and suppliers over the coming months, and when might it run short? Answering early leaves time to renegotiate terms, speed up collections or arrange financing before it becomes urgent. This article explains what the forecast is, which data it uses, how to build it step by step and why overdue amounts are handled separately.
What is a cash flow forecast and what is it for?
A cash flow forecast is a month-by-month estimate of the money that will come into and leave the company's accounts, and of the balance left at the end of each month. It looks ahead, unlike the cash flow report, which records what has already come in and gone out.
Nor should it be confused with profit. A business can show a profit on paper and still run out of money in the bank, because it sells on 60 or 90-day terms and pays its suppliers at 30. The forecast measures when money actually moves, not when a sale is invoiced.
| Tool | Question it answers | Horizon |
|---|---|---|
| Cash flow report | How much came in and went out, and under which headings? | Past months |
| Cash flow forecast | How much will come in and go out, and what will the balance be? | Coming months |
| Profit and loss statement | Did the business make a profit or a loss? | Accounting period |
In practice, the forecast is there to make decisions in good time. Before hiring, making an investment or accepting a customer who pays on long terms, management can see the effect on the balance in the months that follow.
What data do you need to get started?
A forecast is only as good as its starting point. Before projecting anything, five sets of data should be in order.
- The current balance of every account, taken from the statements, with last month's transactions reconciled.
- Invoices to be collected, with customer, amount and due date.
- Supplier invoices to be paid, with amount and due date.
- Taxes and contributions, such as VAT, withholding tax and social security, in the months in which they are paid. Dates and amounts should be confirmed with the accountant.
- Regular payments, such as salaries, rent, insurance, loan instalments and subscriptions.
The first item is the one that most often goes wrong. If the opening balance includes unidentified transactions, or one bank's accounts are missing, every following month inherits the error. That is why bank reconciliation comes before the forecast. The article on how to prepare month-end for your accountant explains how to close the month with no documents missing.
How do you build the forecast, step by step?
- Start from the consolidated balance. Add up the balance of every account on the last day of the closed month.
- Project the money coming in. Place each invoice to be collected in the month it is expected. If a customer usually pays 30 days after the due date, use that date rather than the invoice date.
- Project the known outgoings. Place supplier invoices in the month they fall due and VAT in the month it is paid to the tax authority.
- Add the regular payments. Salaries, rent, insurance and instalments recur and are the most predictable part of the forecast.
- Work out each month's balance. Opening balance plus money in minus money out gives the closing balance, which becomes the opening balance for the next month.
- Separate overdue amounts. Invoices already past due and still unpaid go on a line of their own, outside the forecast balance.
A 12-month horizon shows seasonality, such as the months in which Portuguese companies pay the holiday and Christmas allowances, or months with lower sales. In months where the balance gets tight, it is worth tracking week by week as well.
After each month closes, compare forecast and actual figures, heading by heading. A deviation that keeps recurring, such as a customer who always pays later than expected, is an assumption to correct for the months ahead.
Why do overdue amounts stay outside the forecast balance?
An invoice that has been overdue for three months is not money with a date attached. It might be paid tomorrow, in six months or never. If it goes into the forecast as if it were next month's income, the forecast shows headroom that may not exist.
The prudent rule is therefore to show overdue amounts on a separate line, with the total and the customers behind it. Management then sees two figures, the forecast balance without the overdue amounts and what would come in if they were recovered. The gap between the two is what is at stake in collections. The article on automated collections management covers that side.
Concentration matters too. If a large share of the expected income depends on one or two customers, a delay from either of them changes the whole year. It is worth knowing how much each customer weighs in total invoicing before relying on the forecast.
How does EngiFinance prepare the forecast?
EngiFinance is an online treasury management application for small and medium-sized businesses. EngiFinance is currently available only in Portugal, in Portuguese. It imports the company's bank statements and documents, categorises and reconciles transactions, presents the cash flow and what is still to be collected, and prepares the monthly export for the accountant. The forecast is built from the same data.
- A 12-month forecast. Money coming in is forecast from the invoices to be collected, and money going out from the invoices to be paid, VAT and regular payments. Overdue amounts are kept separate, outside the forecast balance.
- An opening balance taken from the statements. Statements from several banks and accounts are imported from a file, in CSV, Excel, CAMT.053 or MT940, and PDF statements are read by artificial intelligence. The company does not share access to its accounts. The treasury view shows the consolidated balance and the balance for each account.
- Invoices read from the Portuguese tax authority's QR code. The QR code on Portuguese invoices is read directly, without artificial intelligence, and whether a document is a purchase or a sale is determined by the company's tax number. On documents without a QR code, AI reads the number, dates, tax numbers, totals and description.
- Reconciliation. Unambiguous matches are reconciled automatically and the rest appear as suggestions, accepted with one click. Partial payments and payments covering several invoices are handled with the amount of each match.
- Customers. The application shows invoicing by customer, each customer's share of the total, portfolio concentration measured by the HHI index, and outstanding and overdue balances for each customer.
For services and project-based businesses, the Pro plan adds a billing plan per project, which also feeds into the forecast of money coming in. EngiFinance does not issue invoices. It reads the sales invoices issued in the software the company already uses.
A practical example
Imagine an industrial maintenance company with 20 people and accounts at two banks. At the end of October, the consolidated balance is €40,000. The forecast shows around €60,000 a month coming in from invoices to be collected and regular outgoings of €55,000. In November, with the Christmas allowance and the quarter's VAT, outgoings rise to €78,000, and the forecast balance drops to €22,000, the lowest point of the year.
At the same time, there is €18,000 in overdue invoices, nearly all from a single customer. They sit on the overdue line and do not count towards the forecast balance. With this picture, management makes three decisions while it is still October.
- It contacts the customer in arrears and agrees a payment plan.
- It postpones to February the purchase of a piece of equipment planned for December.
- It reviews the payment terms for the next proposals to that customer.
At the end of November, the forecast is reviewed against the actual figures, and the deviation in each heading is explained before the next month is projected. The forecast stops being a file built once a year and becomes the way management sees, every month, the money it can count on.
Frequently asked questions
What is a cash flow forecast?
It is a month-by-month estimate of the money that will come into and leave the company's accounts, and of the balance left at the end of each month. It helps anticipate cash shortfalls and decide in good time.
What is the difference between a cash flow report and a cash flow forecast?
The cash flow report records what has already come in and gone out, by heading. The forecast projects what will come in and go out over the coming months and the resulting balance.
How often should the cash flow forecast be updated?
At least once a month, after the month has been closed and reconciled, comparing forecast and actual figures. In months where the balance is tight, it is worth tracking week by week as well.
Why are overdue invoices left out of the forecast balance?
Because there is no firm date for their payment. Showing them separately avoids headroom that may not exist and makes clear what is at stake in collections.
Does EngiFinance produce a cash flow forecast?
Yes. It forecasts 12 months of money coming in, from invoices to be collected, and money going out, from invoices to be paid, VAT and regular payments. Overdue amounts are kept outside the forecast balance. EngiFinance is currently available only in Portugal, in Portuguese.
Does EngiFinance need access to the bank accounts?
No. Statements are imported from a file, in CSV, Excel, CAMT.053 or MT940, and PDF statements are read by artificial intelligence.