Cash flow problems rarely announce themselves. A business can be profitable on paper and still struggle to pay suppliers, HMRC or staff on time. A reliable cash flow projection helps UK SMEs see these pressure points before they arrive.
What is a cash flow projection? A cash flow projection is an estimate of the money expected to enter and leave your business over a set period, usually 12 months, broken down week by week or month by month. It shows your expected closing cash balance at the end of each period, so you can plan ahead rather than react to a shortfall.
Below, we explain what a dependable projection should contain, how to account for timing and seasonality, and how to keep it accurate over time.
What Is a Cash Flow Projection and Why Does It Matter?
Many owners ask what is cash flow forecasting and whether it differs from a projection. In practice, the terms are used almost interchangeably. Both look forward at expected cash movements, and both rely on realistic assumptions rather than accounting profit.
What is the purpose of a cash flow forecast? Its purpose is to show whether you will have enough cash to meet your obligations as they fall due. That makes it useful for:
- Spotting shortfalls early enough to act
- Deciding when to hire, invest or take on new contracts
- Supporting applications for lending or overdraft facilities
- Planning for tax liabilities such as VAT, PAYE, NIC and Corporation Tax
Which Cash Receipts and Payments Should the Projection Include?
Cash receipts to include:
- Customer payments on invoices, based on realistic collection dates
- Cash or card sales
- Grants, loans or director loan injections
- VAT refunds, where applicable
- Asset sale proceeds or other one-off income
Cash payments to include:
- Supplier invoices and stock purchases
- Wages, along with employer NIC and pension contributions
- PAYE liabilities due to HMRC
- CIS deductions, for businesses operating in construction
- VAT payments and Corporation Tax
- Rent, utilities, insurance and software subscriptions
- Loan repayments and interest
- Capital expenditure, such as equipment or vehicles
Sole traders and partners should also set aside funds for Self Assessment payments on account, which fall on 31 January and 31 July. These are easy to overlook and can be substantial.
If you are unsure which items belong in your projection, the Befree accounting team can help you build a structure that reflects how your business operates.
How Should Payment Timing and Seasonal Changes Be Reflected in the Projection?
Timing is where most projections lose accuracy. Recording a sale in the month you issue the invoice is misleading if your customers typically pay in 45 or 60 days.
To reflect timing realistically:
- Use actual payment behaviour: Review how long customers genuinely take to pay, not the terms on your invoices.
- Map your payment dates: Place supplier payments, payroll, VAT quarters and PAYE settlement dates in the month cash leaves your account.
- Account for MTD: If you are VAT-registered, Making Tax Digital requires digital records and quarterly submissions, so build these deadlines into your schedule.
- Factor in seasonality: Retailers, hospitality businesses and many service providers see predictable peaks and troughs. Use at least one or two years of past data to estimate these patterns.
Which Scenarios Should Be Tested for Potential Cash Shortfalls?
Consider modelling three scenarios:
- Base case: your most likely outcome, based on current trading and known commitments.
- Downside case: reduced sales, slower customer payments or a lost major client.
- Upside case: faster growth, a new contract or earlier collections.
Within these, test specific risks, such as:
- A key customer paying 30 days late
- A rise in supplier costs or employer NIC
- An unexpected tax bill
- A delay in a grant or loan drawdown
How Should Actual Cash Movements Be Used to Update the Projection?
A projection is not a document you build once and file away. Its value depends on how often you compare it with reality.
A simple review routine works well:
- Compare forecast with actual at the end of each month, or weekly if cash is tight.
- Investigate material variances. Was a customer late? Did a cost arrive earlier than expected?
- Update your assumptions. If invoices are consistently paid later than forecast, adjust your collection timings.
- Roll the projection forward. Add a new month at the end so you always look ahead by the same period.
Over time, this process makes your forecasts more accurate and gives you a clearer view of your business’s cash patterns.
Conclusion
Need Help Building a Reliable Cash Flow Projection?
Befree works with SMEs to build clear, realistic projections that support better decisions. To discuss your business, contact Befree today.