How to prepare P&L, balance sheet and cash flow forecasts.

Your forecasts will be wrong. That is fine. Their value is in the assumptions they force you to make and the decisions they help you take: when to hire, when to raise, when you run out of cash.

The three statements

• Profit and loss (P&L). Revenue, costs and profit over a period. It shows whether the business makes money.
• Cash flow. Cash coming in and going out, and when. It shows whether you can pay the bills. Profit is not cash: customers pay late, VAT is paid quarterly, equipment is paid upfront.
• Balance sheet. What the company owns and owes at a moment in time. It is where profit, cash and funding all meet.

Build them in this order

1. Assumptions sheet. Every input in one place: prices, conversion rates, churn, salaries, payment terms, VAT. Label each one with its source or reasoning.
2. Revenue model. Build revenue bottom-up: leads, conversion, customers, price, churn and upgrades, month by month. Avoid “we will win 1% of the market”.
3. Costs. Direct costs (hosting, payment fees, support) to get gross margin; then team, marketing, premises, software and professional fees. Model headcount by name or role, with start dates and on-costs such as employer National Insurance and pension.
4. P&L. Revenue minus costs, monthly. Add depreciation and Corporation Tax once you are profitable.
5. Cash flow. Start from the P&L, then adjust for timing: when customers actually pay, VAT in and out, upfront annual subscriptions, equipment purchases, loans and investment received.
6. Balance sheet. Cash from the cash flow; money owed to and by you; fixed assets; share capital and accumulated profit or loss. It must balance. If it does not, a link is missing.

How far ahead?

Monthly for the next 18 to 24 months, then yearly to year three or five. Investors care most about the next 18 months, because that is what their money funds.

Sense checks

• Does the cash ever go negative? That month is your real deadline.
• Is customer acquisition cost paid back within a reasonable period?
• Does revenue per employee look realistic against similar companies?
• Run a downside case: half the sales, twice as slow. Does the business survive?

Common mistakes

• Hockey-stick revenue with flat costs.
• Forgetting VAT, employer on-costs and payment terms in the cash flow.
• Confusing bookings, billings and revenue.
• Hiding the assumptions. Investors test the assumptions, not the totals.