Cash is considered to be the lifeblood of any business, insufficient or inadequate control of cash is the primary reason for business failure, profitability (rental and/or gains) does not automatically equate to survival and prosperity.


This article will outline the importance of cash flow planning for a property investor and how to prepare and use a cash flow forecast (plan). 


Rental profits are measured by calculating the difference between rents charged to the tenant and the various running costs of the property, this will not necessarily be the same as the final cash received from that tenant.  For example, if the tenant is late paying their rent it does not affect the level of profit we make, but it will have a detrimental impact on their bank balance and the subsequent ability to pay lenders and suppliers. 


Property gains are measured by calculating the difference between capital receipts and capital costs; this will not necessarily be the same as the final cash received on sale.  For example, the repayment of any mortgage balance does not affect the level of gain that we have made, but it can have a detrimental impact on our bank balance – and also our ability to pay any associated capital gains tax.


It is critical that property investors prepare a cash flow forecast, this is vital for risk management and identifying potential problems.  If cash is not pulled in on time to (at least) meet cash liabilities then sustainability is normally maintained by additional borrowings and/or payment delays of liabilities, this will inevitably lead to problems. 

Normally, the main sources of cash inflows to a property investor are receipts from rental income, property sales, increases in bank loans and personal funds introduced into the business.  Cash outflows typically include (capital and interest) loan repayments, payments to suppliers, capital expenditure and taxation.

Net cash flow is the difference between the inflows and outflows within a given period. A projected cumulative positive net cash flow over several periods highlights the capacity of a business to generate surplus cash and, conversely, a cumulative negative cash flow indicates the amount of additional cash required to sustain the business.

Cashflow planning involves forecasting and recording cash inflows relating to rental income, property sales, new loans, interest received etc. and then analysing in detail the timing of expected payments relating to loan repayments, suppliers, other expenses, capital expenditure, tax etc. The difference between the cash in- and out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained.

A cash flow forecast requires us to look at the future and involves a number of steps, in essence we need to consider


  • WHEN do we receive and pay cash?
  • WHAT do we receive and pay cash from/to?
  • HOW MUCH do we receive and pay cash from/to?


Step One:  

Consider and make a list of where the cash is likely to come from, for example rental income, property disposals, loans


Step Two:  

Consider and make a list of where the cash is likely to go, for example loan repayments, management and professional fees, repairs and maintenance, building costs and taxes.


Step Three:  

Once we have made our list in step ones and step two above then we need to estimate and quantify them in financial terms.  Estimate the cost of each item of expenditure as realistically as you can.  Previous history, experience, tenancy agreements, supplier catalogues can help in this respect.


Make a clear note of how you arrived at each figure and on any items you were not sure about. Without the notes you will look back at the figures in a few days and will not remember the assumptions you made!


Some costs are of a recurring nature such as rent, rates, salaries, electricity, postage, stationery, telephones etc. , some will be infrequent and irregular, such as insurance costs, surveying costs, taxation. 


Step Four

Use the financial estimates produced above from step three and estimate when the cash will actually be received and paid.  For example, buildings insurance might be £1,000 for a year but actually has to be paid (cash flow) as one amount at the beginning of the year.


Step Five

Produce a cash flow forecast, applications such as excel are invaluable in this respect.  An extract for the summary is shown below


Month 1

Month 2



















Step Six

Monitoring and revise the budget

We should compare (monthly at least) actual receipts and payments with our estimated receipts and payments, and take actions and make revisions where appropriate.


Mahmood Reza contact details are Pro active Resolutions

Tel: 0116 224 7122  Contact: tax@proactiveresolutions.com