Cash Flow Forecasting for Small Trade Businesses

You can be profitable on paper and still run out of money. It happens to contractors every single day. Jobs booked solid for three months, healthy margins, strong customer base - then suddenly you can't make payroll because everyone's paying 60 days late.

Cash flow forecasting isn't complicated financial wizardry. It's answering one simple question: "Will I have enough money coming in to cover what's going out?" And the answer needs to be "yes" every single week.

The Basic Cash Flow Forecast

A cash flow forecast has three components:

1. Money coming in (inflows): When customers actually pay you (not when you invoice them)
2. Money going out (outflows): When you actually have to pay things (suppliers, wages, VAT, loan payments)
3. Net position: The difference between inflows and outflows

Here's what a basic 4-week forecast looks like:

Key insight from this forecast: Week 1 has negative cash flow (-£700), but the running balance stays positive (£2,300) because there was money in the bank from previous weeks. This is fine. The danger is when the running balance goes negative - that's when you can't pay bills.

How to Build Your Forecast (The Simple Method)

Step 1: List Expected Money In

Go through your outstanding invoices and quotes. When will customers actually pay? Not when they should pay - when they realistically will pay.

• Completed jobs: Check invoice date + customer's typical payment time (30, 45, 60 days?)
• Quoted jobs: If you're 80% sure it'll go ahead, include it at the expected completion + payment date
• Recurring work: Maintenance contracts, regular clients - these are your most predictable income
• Be pessimistic: If a customer usually pays in 45 days, assume 50 days. Better to have extra cash than a shortfall

Step 2: List Money Going Out

Write down everything you'll need to pay and when it's due:

• Weekly: Materials from suppliers (especially trade accounts with payment terms)
• Fortnightly/Monthly: Wages for team, your own salary
• Monthly: Van finance, tool leases, insurance, phone/software subscriptions
• Quarterly: VAT payments (if VAT registered), tax estimates
• Annual: Big insurance payments, professional licences, equipment renewals

Step 3: Calculate Running Balance

Start with your current bank balance. For each week:

• Add money in
• Subtract money out
• Carry the result forward to next week

If the running balance ever goes negative, you've found a problem before it happens. That's the whole point.

Warning Signs Your Cash Flow Is In Trouble

Common Cash Flow Mistakes

1. Confusing Profit with Cash

You invoice £15,000 in January. You spent £8,000 on costs. That's £7,000 profit - but if none of those invoices get paid until March, your January cash flow is -£8,000. Profit doesn't pay bills until it becomes cash.

2. Forgetting About Tax

That £7,000 profit? HMRC wants 20% Corporation Tax (limited company) or up to 45% Income Tax (sole trader). And don't forget VAT if you're registered - you're holding that money for HMRC, not keeping it.

Fix: Put aside 25-30% of all incoming payments into a separate account for tax. Treat it as already spent.

3. Underestimating Payment Times

"Payment terms: 30 days" doesn't mean customers pay in 30 days. It means they're supposed to. Track how long customers actually take to pay and use that in your forecast, not the invoice terms.

4. Only Forecasting When There's a Problem

Forecasting works when you do it regularly - weekly or fortnightly - not just when you're worried about making payroll. By then it's too late to fix it.

How to Fix Cash Flow Problems Before They Happen

1. Invoice Immediately

Job finished Friday? Invoice Friday, not "sometime next week". Every day you delay invoicing is a day closer to running out of cash.

2. Make Payments Easy

Include payment links (Stripe, bank transfer) in every invoice. The easier you make it to pay, the faster customers pay. Invoices that require logging into a bank are paid slower than one-click payment links.

3. Recurring Invoices = Predictable Cash Flow

Maintenance contracts, service plans, retainer work - anything that creates recurring revenue makes cash flow forecasting 10x easier. If 30% of your income is recurring, you only need to forecast the other 70%.

4. Deposit Payments for Big Jobs

50% upfront for jobs over £2,000 isn't just protecting you against non-payment - it's smoothing your cash flow. Instead of waiting 60 days for £5,000, you get £2,500 immediately.

5. Automate the Admin

The fastest way to improve cash flow? Reduce the time between completing work and getting paid. Automated invoicing, payment reminders, and payment tracking cut days (sometimes weeks) off payment times.

The 13-Week Cash Flow Forecast

Once you've got the basics down, expand your forecast to 13 weeks (one quarter). This lets you see:

• Quarterly VAT payments coming up
• Seasonal dips in work (summer holidays, Christmas)
• Big annual expenses (insurance renewals, equipment purchases)
• Whether you can afford to take on an employee or lease new equipment

Update it weekly. Takes 15 minutes. Those 15 minutes are worth more than any other admin task you do - because running out of cash kills businesses faster than anything else.

The Bottom Line

Cash flow forecasting isn't about being a financial expert. It's about not being surprised. When you know a cash shortfall is coming in four weeks, you have time to fix it - delay a supplier payment, chase an overdue invoice, or postpone a big purchase.

When you don't know until the day you can't make payroll, it's too late. That's why 60% of small businesses fail - not because they weren't profitable, but because they ran out of cash before the profit arrived.