What the low point is
Every cash-flow forecast has a month where the closing balance is at its lowest. That is the low point. If the balance there is negative, the size of the negative is your peak funding need: the most money you will need from somewhere other than customers to keep trading. If the business already has cash, the low point is the moment that cash runs thinnest. Either way, it is the single most important number in the document, and most owners have never looked for it.
Peak funding need and headroom
Suppose the forecast's worst month closes at minus £22,000 and you are asking for a £25,000 overdraft. Your headroom is £3,000, or 12 per cent of the limit. That is thin. Forecasts run optimistic, customers pay late, and something always breaks. I would want the facility covering the low point with a margin of 20 to 25 per cent, or I would want to see the low point moved. Here is the shape of it on a simple forecast, with made-up figures.
| Month | Receipts | Payments | Closing balance | Limit | Headroom |
|---|---|---|---|---|---|
| 1 | 18,000 | 24,000 | (6,000) | 25,000 | 19,000 |
| 2 | 19,000 | 27,000 | (14,000) | 25,000 | 11,000 |
| 3 | 21,000 | 29,000 | (22,000) | 25,000 | 3,000 |
| 4 | 26,000 | 22,000 | (18,000) | 25,000 | 7,000 |
| 5 | 28,000 | 21,000 | (11,000) | 25,000 | 14,000 |
| 6 | 29,000 | 22,000 | (4,000) | 25,000 | 21,000 |
Month three is the low point. The VAT quarter lands there and the stock for the busy season has been bought but not yet sold. The balance recovers afterwards, which is the second thing a lender looks for.
Why month-end balances hide the real problem
A monthly forecast shows the balance on the last day of each month. The trouble is that very little happens on the last day of the month. Payroll went out on the 25th. Rent went out on the 1st. The VAT payment left on the 7th. Your customers, on 30-day terms, pay at the end of the month, if you are lucky. So the balance on the 31st can look fine while on the 26th you were £9,000 past your limit and the bank was deciding whether to pay the wages. I have seen businesses with healthy monthly forecasts get into real trouble on the fourth Friday of the month, and the forecast never showed it because it was not built to.
A monthly forecast shows your balance on the one day of the month when nothing happens.
The 13-week weekly view
This is why turnaround practitioners live on a 13-week cash flow. It is weekly, it is built from real invoices and real bills with real due dates rather than monthly averages, and it rolls forward each week. If the low point in your monthly forecast is within a few thousand pounds of the limit, build the 13 weeks around it. It will show you the intra-month trough the monthly view smoothed away, and it is the tool for managing through it. It is also a good thing to show a bank when the monthly numbers look tight. It tells them you are managing cash rather than watching it.
When the low point is too close to the limit
There are only a handful of levers, and it is worth pulling them in order of cost.
- Timing. Can the VAT quarter be changed so the payment does not land in the same month as the stock purchase? Can the big supplier be paid in two halves? Can the capital item be bought a month later? Can a bonus be deferred?
- Terms. Deposits on orders. Stage payments on long jobs. Direct debit collection for regulars. Shorter terms for new customers. Stop paying suppliers early; pay them on the day they are due. Each of these moves cash without changing a single sale.
- Cost. Defer or cut spend around the low point. Hire the second person in month five instead of month three. Lease the equipment rather than buy it.
- Facility size and shape. Ask for what the forecast says you need, with headroom, and ask for the right kind of facility. If the balance never gets back above zero, that part of the borrowing is permanent and belongs in a term loan. An overdraft that is always fully drawn is what bankers call hardcore borrowing, and they do not like it. Loan for the permanent part, overdraft for the swing.
How a lender reads it
A credit analyst finds the low point, checks the month, checks the headroom, then asks two questions. First, what caused it? A one-off (a van, a VAT bill, seasonal stock) is a working-capital story, and banks understand those. A trend, with the balance lower every month, is a loss-making business asking the bank to fund the losses, and no facility size fixes that. Second, does it come back? The recovery after the low point matters as much as the trough itself, because it is the evidence that the facility gets repaid. When I read forecasts for a living, the question I asked about every trough was what brings it back. If the only answer was that sales would grow, I discounted it heavily. If the answer was that the busy season starts, that the retention is released in month eight, that the big contract invoices in month five, I could check it, and that made all the difference.
No forecast earns a yes on its own. But a forecast that shows the low point plainly, explains it, covers it with a margin and shows the way back up is one a lender can say yes to. One that hides it is one they will not trust, even if the hidden number was fine.
Common questions
How much headroom should I leave against an overdraft limit?
My rule of thumb is 20 to 25 per cent of the limit at the worst month, more if your customers are slow payers or your sales are seasonal. Below 10 per cent I would rather move the low point than hope.
Should the forecast ever show the balance going below zero?
If you are asking for an overdraft, yes. The negative months are the reason for the facility. Hiding them makes the request look unnecessary and the forecast look managed.
Monthly or weekly?
Monthly for the lender, for twelve months or more. Weekly, rolling 13 weeks, for yourself whenever the monthly low point is within a few thousand pounds of the limit.
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