What is a Cash Flow Forecast Report?

what is cash flow forecasting

What is a cash flow forecast?

A cash flow forecast is a financial tool used by businesses to estimate the future cash inflows and outflows over a specific period, typically monthly or quarterly. It helps in predicting the amount and timing of cash that will be received and paid out, allowing businesses to effectively plan and manage their finances.

Creating a cash flow forecast is generally entrusted to the finance team of a business. However, in larger businesses, an accurate forecast requires data collection from multiple sources, both inflow and outflow. If you’re trying to learn more, this article should help you to understand the processes involved.

Why use a cash flow forecast?

A business will need to use cash flow forecasts to help plan how much cash they’ll need in the future. By reviewing different positive situations, or completing “what-if” analysis through a scenario analysis software, businesses can see how changes made to their financial plan effect the final outcome. In order to make strategic decisions, seeing these alternate options is so important.

On the other side of the coin, you can also review difficult periods of your financial year, projecting your best options in multiple simulations of a cash flow forecast. This can be the make or break moment for your business. If your business runs out of cash, it’s lifespan will be immediately shorter. Fortunately, with a good cash flow forecast, you shouldn’t find yourself in that situation.

Overall, a cash flow forecast is a powerful tool that enhances financial planning. It provides businesses with greater control over their finances and helps them navigate through various financial challenges more effectively.

How to forecast cash flow?

Forecasting cash flow involves several steps. Here’s a general outline of the process:

  1. Gather data: Collect relevant financial information, including historical cash flow statements, sales records, and other financial documents. This data serves as the foundation for building an accurate forecast.
  2. Determine forecast period: Decide on the time period for which you want to create the cash flow forecast. It can be monthly, quarterly, or any other suitable duration based on your business needs. A 13 week forecast is often desirable.
  3. Estimate cash inflows: Identify and project the various sources of cash inflows. This typically includes revenue from sales, investments, and any other incoming cash. Consider factors such as customer payment terms and potential changes in revenue streams.
  4. Estimate cash outflows: Determine and forecast the expected cash outflows. This involves analyzing historical data and considering expenses such as payroll, rent, inventory purchases, and any other anticipated payments.
  5. Consider timing: Determine when cash inflows and outflows are expected to occur. Take into account payment terms, seasonal fluctuations, and any specific timing factors relevant to your business. This will help you identify potential periods of cash surplus or shortage.
  6. Make assumptions: In forecasting cash flow, certain assumptions must be made since the future is inherently uncertain. These assumptions may include factors like market conditions, customer behavior, inflation rates, and any other variables that can impact cash flow.
  7. Analyze and refine: Review the forecasted cash flow statement and analyze the projected cash position. Identify any areas of concern, potential risks, or opportunities. Adjust and refine your assumptions based on new information, or changes in your business circumstances.
  8. Monitor and update: Regularly track your actual cash flow against the forecasted figures. Update your cash flow forecast as new data becomes available and compare it with the actual performance. This allows you to assess the accuracy of your forecast and make adjustments if needed.

It’s important to note that creating a cash flow forecast involves a level of uncertainty, and actual cash flow may deviate from the forecast due to unforeseen circumstances. However, by following these steps and continuously monitoring your cash flow, you can improve the accuracy of your forecasts and make better-informed financial decisions.

How to forecast cash flow

Why are cash flow forecasts important?

Utilising cash flow forecasts is imperative to the success of your business. Here are some key reasons.

Improved financial planning: Cash flow forecasts provide a clear picture of the expected cash inflows and outflows, enabling businesses to plan their finances effectively.

Understanding and managing liquidity: A cash flow forecast helps businesses ensure they have enough cash on hand to cover their expenses. It allows them to plan for cash shortages or surpluses, take appropriate actions, and maintain adequate liquidity levels.

Better management of working capital: By predicting cash inflows and outflows, businesses can plan their working capital more effectively. It helps prevent working capital imbalances and ensures sufficient funds are available to support day-to-day operations, such as paying employees.

Valuable decision making: Cash flow forecasts help assess the financial feasibility of projects, evaluate the impact of potential business decisions on cash flow, and identify areas where cash can be optimized or costs reduced. Accurate forecasts enable better decision-making and strategic planning.

Beneficial for investors: Cash flow forecasts are essential when seeking financing or making investment decisions. Lenders and investors often review cash flow projections to assess the borrower’s ability to repay loans or generate returns.

Accurate risk management: Cash flow forecasts help identify potential cash flow issues, such as late payments from customer. By anticipating these risks, businesses can take proactive measures to mitigate them and ensure financial stability.

Essential for stakeholder and investor communication: Cash flow forecasts are often required for financial reporting and communicating with stakeholders such as investors, shareholders, and creditors. Accurate and transparent cash flow forecasts enhance communication, build trust, and provide a comprehensive understanding of a company’s financial health.

Overall, cash flow forecasts are essential tools for financial planning, risk management, decision-making, and maintaining the financial stability of businesses. They provide valuable insights into cash availability, facilitate efficient resource allocation, and support informed financial strategies.

The advantages of cash flow forecasting

We have discussed some of the key reasons a cash flow forecast is so important, and these can also be referenced as advantages. So, we have put together a small list of some more uncommon advantages that you may not have considered when planning your cash flow.

While the common advantages of cash flow forecasting have been covered, there are also some lesser-known or uncommon advantages:

Identify new opportunities: Cash flow forecasting can help identify potential opportunities for growth or improvement. By closely examining cash flow patterns, businesses can spot areas where they can optimize cash flow. It serves as a diagnostic tool to uncover hidden potential within the financial operations of a company.

Early warnings of financial difficulties: By regularly monitoring and updating the forecast, businesses can identify cash flow problems in advance. This early awareness allows them to take proactive measures to prevent or mitigate potential financial crises.

Improve efficiency of resource allocation: By having a clear projection of cash inflows and outflows, businesses can allocate resources strategically. This leads to better resource utilization and maximizes the potential returns on investment.

A disciplined cash flow culture: Implementing cash flow forecasting promotes a deeper understanding of cash flow dynamics and encourages employees to consider the financial implications of their actions. This helps create a more financially conscious and responsible workforce, leading to improved overall financial management.

By leveraging these advantages of cash flow forecasting, businesses can gain a competitive edge, make more informed decisions, and foster a financially resilient organization.

An example of cash flow forecasting

We have mentioned that there are different levels to a cash flow forecast. It can be monthly, quarterly, or annually. Here is an example of what a cash flow forecast looks like within the Brixx.

what does cash flow forecasting look like

How can automation help with a cash flow forecast?

Financial planning as a small business can take a large amount of time and resource to complete. Utilising the classic method of forecasting within Excel or using spreadsheets can be enormously time consuming, and while they are beneficial for certain tasks, automating the process and save considerable amounts of time.

By using a financial forecasting tool, businesses can automate and improve their financial forecasting. Brixx allows you to do this with a host of smart forecasting features. Sign up to a free trial today to see how this can help you.

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