What is a Cash Flow Forecast? Know All About It

Cash Flow Forecast

Cash Flow Forecasting can be best explained as the process of obtaining an estimate or forecast of an organization’s future financial position. It is a core planning component of financial management within an organization and plays a crucial role.  The main output or deliverable of a cash flow forecasting process is a cash flow forecast. A cash flow forecast is a projection of an organization’s future financial position based on expected payments and receivables. The process of deriving a cash flow forecast is called cash flow forecasting.

According to experts of dissertation writing services, the main objective of cash flow forecasting is to assist with managing liquidity within an organization. It ensures that the business has the necessary cash to meet its obligations and avoid funding issues, essentially better management of working capital.

A business usually starts by planning how much it expects to earn in sales, then how much it expects to spend in day-to-day running costs, and finally how much it expects to receive from other sources such as loans and pay for other costs such as buying new equipment. A cash flow forecast will not match a profit forecast because profit is when income is earned and when costs are incurred. On the other hand, a cash flow forecast is based on when income is received and costs are paid for.

Underneath the high-level goal of liquidity management, there are several reasons why companies set up a cash flow forecasting process. They include:

  • Covenant forecasting and half/ full-year reporting visibility
  • Interest and debt reduction
  • Short term liquidity planning
  • Long term planning/ budgeting purposes

Methods Used For Cash Flow Forecasting:

There are two main types of methods used for cash forecasting methods; direct or indirect. Direct cash forecasting is a method of forecasting cash flows and balances for short-term liquidity management purposes, typically less than 90 days in duration. Direct cash forecasts often but not always include system-based cash flows to make the cash forecast as close to real-time as possible. Indirect cash forecasting is often longer-term in nature and it relies on various indirect methods of building up cash forecasts such as using projected balance sheets and income statements.

How Cash Flow Forecast Helps Business:

As cash flow forecast is a tool used to show the timings of cash inflows and outflows of a business over a specific period; businesses can keep a close eye on things to know what their bank balance will be at any point in time. To generate a cash flow forecast, a business can take a period, for example, one year. The cash flow is split into two sections: income and expenses. Each section is then totalled at the bottom and the net movement is calculated. For instance, if they are expected to pay £10,000 into the bank in January, they would record that in the income section to keep track and ensure that payments are made on time.

The next step is recording the expenses. Expenses can include any expenditure that is being made in regards to the running of the business; it can include advertising, accountancy fees, bank fees, tax, direct expenses, wages, general expenses, rent, telephone, and internet, among others. After all the expenses have been added to the list, businesses need to enter their opening bank balance to keep an eye on the cash inflow or outflow and manage finances most efficiently.

Management of Cash Flow Forecasting Process:

In large organizations, the cash flow forecasting process is managed and controlled by the head office treasury or finance team. The work to be done in terms of assembling a forecast position generally involves sourcing data from both systems and people. The more complex or big an organization is, the more systems and people will contribute to the process; therefore it is critical to have the sources of cash flow data mapped and clearly defined so that things can proceed as predicted and there are not cash flow issues that can land an organization in a financial mess.

Only with the right figures and estimated, it is possible to predict cash flow forecast accurately. It is essential to understand that while the cash flow forecasting management systems are crucial; it is the buy-in and engagement of the financial experts that will determine how successful a cash forecasting process will be. To ensure the process goes smooth and trouble-free, it is necessary to involve the people who will be accountable and ensure their buy-in is a key factor for success, particularly for direct cash flow forecasting.