How to set up cash flow reporting and a cash flow forecast

Cash flow is not profit — and the difference can sink you

Profit is what is left on paper after your costs, measured over a period. Cash flow is the actual money moving in and out of your bank account. They are not the same number, and they are often not even close.

A business can be profitable and broke at the same time. Say you land a €40,000 order, deliver it, and book a healthy profit. But the customer pays on 60-day terms, while your staff, your supplier and the tax office all want paying now. On paper you are winning. In the bank account you are sweating.

For an SME, this is not a technicality — it is existential. A large company rides out a cash gap on a credit line nobody thinks twice about. A twelve-person company misses payroll. Cash, not profit, is what keeps the doors open.

The two things you actually need

The cash flow statement — the rear-view mirror. What came in, what went out, and where you landed over a period. The logic is simple: opening balance, plus money in, minus money out, equals closing balance. It tells you what already happened.

The cash flow forecast — the windshield. Exactly the same logic, pointed forward: what you expect to come in and go out for the period ahead. This is the one that changes decisions, because it warns you while there is still time to do something.

Most SMEs have neither, and run the business on the balance showing in the banking app. That number tells you where you are today. It tells you nothing about the €18,000 VAT bill due on the 31st.

Start with the past, not the future

Almost everyone wants to start forecasting immediately. Resist that. Build the last few months first, as they actually happened, and check the result against reality.

The reason is simple: a forecast built on an incomplete picture is confidently wrong. Reconstruct the past and you find the things you would otherwise have forgotten — the annual insurance premium, the quarterly VAT, the lease payment that leaves on the 2nd. Then compare your reconstruction with the actual closing balance on your bank statement at the end of each of those months.

Does it match? Then you are done, and you can extrapolate with confidence. Does it not match? Then something is missing, and you would far rather discover that now than in a forecast you were relying on.

Two cash flows: high level and bottom-up

You do not need one cash flow. You need two, and they answer different questions. Which one you reach for depends entirely on how close to the edge you are.

The high-level cash flow — monthly, for steering. Start with your EBITDA and work toward cash. Adjust for the timing differences — you rarely pay an invoice the day you receive it, and you rarely get paid the day you send one. Then add the things a profit figure ignores: capital expenditure (any investment your accountant had to capitalize rather than book straight to costs), plus financing — money drawn down, interest paid, and repayments on existing loans.

This is the version that belongs in your monthly management reporting, right next to the P&L. Every management report should include a cash flow — it is simply good practice, and it is what your management team and your shareholders need in order to see the business properly. If your business is reasonably stable and cash is not tight, this monthly view is enough. You do not need to know what happens on the 17th when you are nowhere near the edge.

The bottom-up cash flow — daily, for when it is tight. When you need to be certain you will not hit the ground between now and the next large receipt, a monthly figure is useless. Then you build from the bank up. Export every transaction from your bank account as a CSV — all of them. Sort them into categories that reflect your business, using simple rules on the description text to do most of the work. The categories should flag your largest cost positions and cash impacts; group all the small stuff into one bucket that captures the rest. Typically that means customer receipts, salaries, contractors and freelancers, taxes, rent and material — and often lease payments, interest and loan repayments too.

The good news about the bottom-up route: if you map every single transaction in the bank, it is impossible to miss anything from the past.The truth is right there.

When it gets tight, forecast day by day, not week by week

Extrapolating a monthly view should be easy, and if all you want is a cash flow for your reporting, keep it that way. But if your business is going through a season where you need a sharp eye on the cash flow projection, you should always go day by day.

Either way, once the past reconciles, extrapolating is less work than you expect. In the large majority of cases, copying the past forward and adjusting it with what you already know about the months ahead gets you to a good first estimate. You know which customer is about to be invoiced, which contract ends, which machine you are buying.

Two things about how you build it, though, and they matter more than the arithmetic.

Use real payment dates, not invoice dates. If a customer is on 45-day terms and reliably pays on day 55, that money lands in week 8, not week 1. Forecast the customer you actually have, not the one on the contract.

Go day by day for about 13 weeks. A quarter is the practical horizon — far enough ahead to act, near enough to be accurate. But build it at day level, not week level. Salaries, rent and tax payments land on specific dates, and often on the same one. A weekly column can look perfectly healthy while hiding the fact that on the 25th you are €9,000 overdrawn, right up until the large customer payment arrives on the 27th.

Starting and ending the month in the green is nice. But if you have to go into the red to pay rent and salaries — and you do not have an arrangement with your bank to do that — you are still exposed.

Then keep it rolling. Update it weekly, replace estimates with actuals, and push the window one week further out. That has a second benefit beyond staying current: comparing what you predicted with what happened shows you where your assumptions hit the mark, and where you need to take aim again.

What it looks like on the page

Here is the shape of it, simplified to four weeks and a handful of categories. Follow the closing-balance row:

Week 3 is where this business breaks. Salaries and the tax bill leave in the same week, and the €22,000 customer payment does not arrive until week 4 — so the balance drops to −€7,700. You knew that three weeks out, which is enough time to chase the customer, agree a date with the tax office, or arrange an overdraft while it is still a routine conversation rather than an urgent one.

And note what even this table hides: within week 3, the salaries may leave on the 25th and the tax payment on the 27th. At day level you would see exactly which morning the account goes negative — which is the difference between managing it and discovering it.

Where cash forecasts go wrong

Invoice date is not payment date. The single most common mistake. Your forecast has to run on when cash actually moves. Get this one wrong and everything after it is fiction.

The lumpy payments ambush you. Payroll and rent you remember — they are every month. It is the quarterly VAT, the annual insurance and the once-a-year tax bill that blow a hole in a week you thought was fine.

Optimism about who pays on time. Assume your slow payers stay slow. Forecast the customer you actually have, not the one you wish you had.

Confusing “profitable” with “safe”. A profitable quarter with all the cash tied up in unpaid invoices is still a quarter you cannot make payroll in.

Building it once and never touching it. A forecast you built in March and have not updated since is a museum piece. The value is in the weekly rhythm, not the spreadsheet.

What good looks like

You can hold your own setup against this list:

• You have rebuilt the last few months from your bank data, and it reconciles to the real closing balances.
• You have a rolling 13-week forecast at day level, updated every week.
• Inflows are timed to when customers actually pay, not when you invoiced.
• The lumpy payments — VAT, tax, insurance, annual licenses — are all in there.
• You can see a thin day coming weeks before it arrives.
• You have a cash buffer, and you know how many weeks it buys you.

Seeing your cash clearly is the first half of the job. Actually improving it — getting paid faster, using your supplier terms, freeing the cash sitting in stock — is a subject of its own, and one we cover in the guide to cash flow management.

Frequently asked questions

You could build this yourself. The question is whether it stays built.

Let's be honest: you can put together a first cash flow forecast in an afternoon with a spreadsheet. The template is not the hard part, and you are more than capable of it.

The hard part is keeping it true — updating it every week, tracking the real payment dates, spotting the thin day while there is still time, and actually acting on what it tells you. That is the bit that quietly slides off a busy founder's desk, right up until the week it matters most.

That is what we do. Providing controlling as a service to SMEs and fractional CFO services for the strategic questions, Schmidt Finance & Insight can help you ask the right questions, set up a cash flow and — especially — keep it current. We rebuild the past from your bank data so nothing is missing, get the timing right, keep it rolling day by day, flag the tight dates early while you still have options, and connect it to the rest of your reporting so it is one honest picture rather than a silo. And if your books are not structured well enough to do that, we start with your accountant.

Off your plate. Kept current. Peace of mind that if a thin week is coming, you will know in time to do something about it.