How do I forecast a charity's cashflow?

England and Wales: This page sets out the approach in full. Scotland: the same approach, with no difference — cashflow forecasting is a management technique, not a matter of charity law, and the SORP mechanics behind it are identical UK-wide. Northern Ireland: the same approach, with no difference, for the same reason.

Is a cashflow forecast the same as a statement of cash flows?

A charity cashflow forecast and the statement of cash flows are different documents doing different jobs. The names are close enough to cause real confusion.

A cashflow forecast is forward-looking management information. It shows when cash is expected to land in the bank and when it is expected to leave. It is the treasurer’s own working document, updated as often as needed. This page assumes the trustees have approved a budget for the year; if not, build your first annual budget first — the forecast starts from it.

The forecast works the same way in England and Wales, Scotland and Northern Ireland. Nobody outside the charity sees the forecast unless it is shown to a lender or a funder by choice. It is not filed with the Charity Commission, OSCR or the Charity Commission for Northern Ireland.

The statement of cash flows is a historical primary statement inside the annual accounts, governed by the SORP. Whether a charity has to prepare one depends on more than one thing. It turns on the charity’s SORP tier. It also turns, separately, on whether the charity meets the FRS 102 small entity definition.

A smaller charity that fails that second test still needs a statement of cash flows, even if the SORP tier alone would suggest otherwise. Some commentary reports the requirement by tier alone. That misses the second condition.

The forecast this page is about is the first of those two documents, not the second. Building it well does not prepare the statutory statement for you. Building the statutory statement does not replace it either. They serve different readers, on different timescales, for different purposes.

Which date does a cashflow forecast use?

A cashflow forecast uses the date money moves, not the date it is recognised as income. The recognition rules decide which financial year a grant counts as income. They are set out in How do I account for a grant that must be spent on something specific?. The forecast has to deal with the gap they create.

Recognition and receipt are often different dates, sometimes months apart. A forecast built by copying the budget’s recognition-based figures straight across will not show that gap at all.

Build the forecast instead from when cash is expected to land and to leave. That means:

• the date a funder’s claim is likely to be paid
• the date payroll runs
• the date a supplier’s invoice falls due

Use those dates whatever financial year each amount was, or will be, recognised in the accounts. The two documents are related but not interchangeable. The budget answers “does the year work”, the forecast answers “does every month in it”.

How does a rolling forecast work?

A useful forecast is monthly, not annual, and rolls forward instead of resetting at the year end. It covers at least the coming twelve months. It is refreshed as actual figures replace estimates. Each month’s column works the same way:

1. Start from the opening bank balance.
2. Add expected receipts for the month.
3. Subtract expected payments.
4. Carry the closing balance into the next column as the following month’s opening figure.

The number to watch is not the year-end total, which the budget already gives you. It is the lowest point the running balance reaches in any month, and when.

Statutory sick pay and the sickness-cost trough

A cashflow forecast should show the shape of unavoidable costs as well as income. One of those costs, statutory sick pay, changed shape recently. It is now payable from the first day of a qualifying absence, not after a waiting period, and with no lower earnings limit. So staff sickness now causes an earlier cash outflow than the same absence would have caused before.

For part-time or casual staff who used to fall below the earnings floor, the outflow is also larger. A forecast built on the old assumption will put the trough later, and shallower, than it will be. Managing the absence itself is covered in how to handle sickness absence.

The forecast as evidence for going concern

A rolling cashflow forecast is the evidence base for the trustees’ going concern assessment. Nothing compels a charity to produce a cashflow forecast as such. But for accruals accounts the SORP requires the trustees to make their own going concern assessment. That is not a management choice, and it has to rest on evidence.

A rolling forecast that shows the charity can meet its commitments as they fall due is that evidence. Without a forecast, a charity reaches the going concern question when the trustees assess going concern with nothing to start from.

With the forecast running, the next step is to calculate your full cost recovery rate.

Common mistake: confusing a cashflow forecast with the statement of cash flows in the accounts

The names are almost identical. They are different documents doing different jobs.

One is forward-looking management information. The other is a historical primary statement governed by the SORP. Whether the latter is required depends on tier and on whether the charity meets the small entity definition, not on tier alone.

Common mistake: forecasting on the recognition date rather than the payment date

The budget is built on recognition, and the forecast is often copied straight from it. A charity can be solvent on paper and unable to pay wages, particularly where a funder pays in arrears against claims.

Worked example

Tollgate Youth CIO’s one employee is funded by a grant paid quarterly in arrears against submitted claims. In the budget, the post’s cost is recognised evenly across the year. In the cashflow forecast, the picture looks different.

The salary goes out every month. But the matching grant instalment arrives only once a quarter, and up to several months after the claim covering it was submitted. The forecast, not the budget, shows the month when the gap is widest. That gives the treasurer time to arrange a short-term bridge before that month, not after.

If the bridge is a loan, first decide and minute the borrowing position.