What is cash flow forecasting? | Definition & Meaning

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Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term.

A medium-term cash flow forecast may cover between one month and one year ahead, while a long-term forecast will be used to look at sales and purchases further into the future – between one year and five years ahead or even longer, depending on the nature of the business. The longer the time horizon of a cash flow forecast, the less accurate it is expected to be.

The result of cash flow forecasting is a cash flow forecast document which shows your projected cash position based on income and expenses for the selected timeframe. This is an important tool when it comes to making decisions about activities such as funding, capital expenditure and investments.

Cash flow forecast example

Cash forecasting can be carried out for a range of time horizons, but the following example shows a simple one-month cash flow forecast for a business in the month of January, with net cash flow calculated as the difference between total inflows and total outflows:

Opening cash balance	$3,000
Cash inflows
Sales	$15,000
Total inflows	$15,000

Cash outflows
Marketing	$1,000
Raw materials	$8,000
Wages	$4,000
Total outflows	$13,000

Net cash flow	$2,000

Closing cash balance	$5,000

What is the purpose of a cash flow forecast?

Predicting future cash flow is a top priority for any company, as it helps you optimize your cash position, prepare for future cash flow problems, and make better-informed decisions. At the most basic level, a cash flow forecast can estimate if you will have a positive cash flow (meaning more cash is coming into the business than going out) or a negative cash flow (meaning more cash is going out than coming in) at a given point in time.

Armed with an accurate cash flow forecast statement, you can minimize the cash buffer needed for unforeseen expenses and make better use of your company’s excess cash. You can also plan ahead for any expected cash deficits and manage FX risk more effectively. What’s more, an accurate and timely projection can help boost the forecaster’s profile and reputation with key stakeholders within the business.

Cash flow forecast challenges

However, companies often find it difficult to forecast their cash flows accurately – particularly if the business operates across a variety of countries and currencies. In order to build an accurate cash flow forecast, the forecaster will need to obtain accurate, up-to-date information from a variety of different sources around the organization. This can result in a number of challenges, including:

Time. Forecasting can be an arduous and time-consuming process, particularly if the forecast is based on spreadsheets and involves manual data collection.
Errors. Manual data collection processes may also run the risk of data inputting errors and inconsistencies.
Lack of co-operation from stakeholders. Internal stakeholders may fail to provide information on time or in the required format – particularly if they do not understand why the forecast is important.
Lack of forecasting tools. Once the required information has been sourced, the forecaster will need to have suitable tools in place to turn the data into a forecast. But without sophisticated tools available, this can be an unwieldy undertaking.

In order to overcome these challenges, companies should consider how they can improve the data collection process and make use of technology to maximize the accuracy and timeliness of the resulting forecast.

In order to streamline the forecasting process, the forecaster needs to ensure that the people who need to provide information understand the importance of the forecast and the level of detail required from them. Another important consideration is the need for executive sponsorship. If senior management demonstrates clear commitment to the forecasting process, stakeholders are more likely to engage with the process and the forecast is more likely to provide value.

Also important is understanding that forecasting doesn’t end once the forecast itself is up and running. The accuracy of a cash flow prediction should also be monitored on an ongoing basis by comparing forecast and actual cash flows. While few forecasts will be 100% accurate, monitoring the level of accuracy achieved by the forecast gives the company the ability to pinpoint any areas for improvement. A feedback loop should also be established so that appropriate action can be taken to address any variances.

The importance of cash flow forecasting

Focusing on overcoming any challenges you face in putting together a cash flow forecast is time well spent, because the importance of cash flow forecasting in financial planning can’t be overstated. While business owners, C-suite executives, or senior management will generally understand the business’ financials implicitly and may have expectations of profit and loss, they can’t predict the future.

Without using a formal data-led process to forecast future cash flow, it’s almost impossible to predict changes to sales or costs and estimate how much cash your company will have at any given time. That makes it incredibly difficult to make informed business decisions about current or future spend, understand how to plan for change, or confidently pursue business growth.

With the insights that are delivered by a cash flow forecast statement, even with the understanding that they’re not exact, it’s possible to make more intelligent working capital decisions that fuel future growth or protect the business against potential instability.

Cash flow forecasting solutions

Cash flow forecasting software can help companies forecast their future cash flows with greater accuracy.

Sophisticated cash forecasting solutions can use both live and historical data on the company’s payables and receivables, alongside technologies such as machine learning, to provide fast and accurate near-real-time forecasts. These may take into account not only current purchase orders, payables and receivables, but also behavioral patterns such as invoice approval times.

Visualization tools can help companies understand the forecast quickly and easily, thereby facilitating corporate decision-making. In addition, cash forecasting tools which integrate seamlessly with the company’s ERP instances around the world can reduce the challenges associated with gathering information from disparate sources.

FAQs

Why is a cash flow forecast important?

Creating a cash flow forecast can help businesses to better understand expected cash movements over a selected period of time. This projection of future finances, in turn, allows businesses to make more informed decisions, avoid finding themselves short on cash when they need it, and know how much capital they have to pour into fueling growth.

How do you do a cash flow forecast?

At its most basic level, a cash flow forecast is essentially a log of expected inflows and outflows of money into your business over a set timeframe. Therefore, creating a cash flow forecast is theoretically as simple as filling out a spreadsheet with all projected income and expenses over that period. However, at enterprise level where there can be thousands of different sources of income and expenses, cash flow forecasts can become much less simple to put together. In these circ*mstances, it’s often easier to use dedicated cash flow forecasting software.

What is included in a cash flow forecast?

Cash flow forecasts should contain four main categories of information: expected income, projected dates for when you’ll receive that income, expected costs, and projected dates for when those costs will be incurred. However, at a more granular level, a cash flow forecast will include income from sources like sales, interest, and sale of assets and expenses from sources like materials, wages, and marketing.

How can you improve your cash flow forecast?

Improving the value that a cash flow forecast delivers is best achieved by improving the accuracy with which you forecast future income and expenses. That can be done in a range of ways, but some of the most common include refining your approach to demand forecasting and ensuring you keep perfectly accurate logs of expenses. Most importantly, though, is to compare your previous cash flow forecasts with the actual income and expense data from the same period. This can help you to understand where your forecasting approach works well and where it falls short, leading to gradual improvements to the overall process.

What is cash flow forecasting? | Definition & Meaning | Taulia (1)

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FAQs

What is cash flow forecasting? | Definition & Meaning | Taulia? ›

Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time.

Read The Full Story ›

What is the meaning of cash flow forecasting? ›

Cash flow forecasting involves estimating your future sales and expenses. A cash flow forecast is a vital tool for your business because it will tell you if you'll have enough cash to run the business or expand it.

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What is the cash flow forecast system? ›

This essential tool is designed to help businesses predict their financial future, including their income and expenses, and measure how they are performing against their plans.

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What is the cash flow forecast and decision making? ›

Cash flow forecasting is not just a financial exercise; it's a critical tool for effective business management and decision-making. Glimpsing into your business's financial future empowers you to plan ahead, make strategic choices, and ensure long-term success and sustainability for your business.

Learn More Now ›

What is forecast and actual cash flow? ›

While forecast cash flow is a prediction based on calculations, actual cash flow is based on real figures and revenue streams and not dependent on any guess work. Actual cash flow consists of both a company's income and expenses, so it can provide a clear and reliable picture of a business' financial position.

What are the common methods used in cash flow forecasts? ›

The direct method is for short-term forecasting and shows cash needs and working capital fund requirements. It is done by analyzing upcoming payments, receipts, credits, and debts. The indirect method is for long-term forecasting and shows the amount of cash required to pay for long-term projects and growth strategies.

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How do you forecast direct cash flow? ›

The process for preparing direct cash flow forecasts is relatively simple. You can use a spreadsheet or accounting software to help you record your transactions and the due dates. Then, you add all the inflows and outflows to get your total cash balance for that period.

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What is the difference between a budget and a cash flow forecast? ›

A budget covers a year or longer and focuses on income and expenses, while a cash flow forecast (generally) covers a shorter period and focuses on the timing of cash inflows and outflows.

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What is the main purpose of a cash flow forecast? ›

Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term.

Tell Me More ›

Do cash flow forecasts show profit? ›

Your cash flow forecast predicts how much cash you will receive each month and how much cash you will spend each month to predict how much money you'll have in the bank at the end of every month. This is a crucial distinction because profits and cash are very different.

How to speed up cash inflow? ›

6 Strategies for Accelerating Cash Flow in Your Business

Reduce your spending. Decreasing your spending is one of the more obvious ways to increase your cash flow. ...
Create additional revenue streams. ...
Offer discounts for fast payments. ...
Watch your inventory. ...
Consider raising your prices. ...
Offer prepayment rewards.

What is cash flow forecasting? | Definition & Meaning | Taulia (2024)

Cash flow forecast example

What is the purpose of a cash flow forecast?

Cash flow forecast challenges

The importance of cash flow forecasting

Cash flow forecasting solutions

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FAQs

What is cash flow forecasting? | Definition & Meaning | Taulia? ›

What are the common methods used in cash flow forecasts? ›