What is a Cash Flow Forecast

The act of projecting cash flow into and out of a firm over a given period is known as cash flow forecasting.

What is a Cash Flow Forecast
21 June 2022

The act of projecting cash flow into and out of a firm over a given period is known as cash flow forecasting. That being said, another essential question appears: what is the cash flow forecast in business? One can argue that an effective cash flow prediction assists businesses in forecasting future financial situations, avoiding severe cash shortages, and earning profits on any cash surpluses in the most efficient manner. 

Cash flow forecasting is usually the duty of a company’s finance team. However, developing a projection necessitates involvement from multiple stakeholders and data sources inside a corporation, particularly in larger organisations. 

Here’s a fast introduction to cash flow, through which you will learn how to get better at it in a much more efficient way for your company.

How to Make a Cash Flow Forecast

The following are the foundations of optimised cash flow forecasting for your firm.

  • Your business objectives
  • The needs of your management team or investors
  • The availability of information inside your organisation

Of course, there are several other factors. For example, a firm that wants insight into its quarter-end covenant status would require a different forecasting strategy than one that has to manage debt obligations weekly. So here’s the approach we advocate for developing a cash forecasting model and the kind of data you’ll need to do so.

Identify Your Forecasting Goal(s)

To ensure that a cash flow forecast provides managing data from varied sources, you should first identify the business purpose the forecast may serve. For instance, most firms utilise cash predictions to achieve one of the following goals.

  • Short-term liquidity planning: Monitoring the cash allocated daily to guarantee your company can satisfy its short-term commitments. On that specific basis, Debite gives you a fantastic way to have a better short-time liquidity planning: spend now, pay later option—a virtual corporate card allows you to spend now, pay later anywhere, anytime where Visa is accepted.
  • Interest and debt reduction: Assuring the company has adequate liquid assets to deposit funds on whatever liabilities or debt it has embarked on. 
  • Visibility of the covenant and important dates: Portraying current cash balances for critical reporting periods such as the end of the fiscal year, quarter, or season. 
  • Management of liquidity risk: Providing transparency into any liquidity concerns that may change shortly thus that you may handle them sooner. Again, on that point, you may think of using Debite’s flexible pay over time feature, which allows you to set your terms and split your expenses up to 12 months. By doing so, you can decrease the risk and increase the benefits.
  • Growth strategy: Ensure the company has enough operating cash available to cover potential revenue operations.

Understand What is Cash Flow Projection

The best way to completely understand cash flow’s function is to base a projection on the type of your organisation. For instance, companies already in debt will benefit from developing a cash projection to plan for upcoming expenses. However, they don’t need a projection that promotes relatively brief liquidity management unless they are similarly cash-strapped.

Determine a Forecasting Period for Your Business

After you’ve identified the business goal you want to accomplish with a cash flow projection, the following item to consider is how far into the horizon your forecast will reach.

In general, there is a trade-off between information availability and prediction length. That is, further and further into the distance the prognosis appears to be, the less comprehensive or accurate it is likely to be. As a result, selecting the appropriate quarterly report can significantly influence the results and dependability of your prediction. 

Here are some other forecasting periods we propose, as well as potential answers to a question like “what does a cash flow forecast show”:

  • Forecasts for the short term: Short-term predictions are generally up to four weeks before the event and include a continuous analysis of money transfers and revenues. As one might think, short-term forecasts are frequently particularly fit for short-term liquidity forecasting, when day-to-day granularity is crucial to guarantee a corporation can fulfil its contractual needs.
  • Medium-term projections: Moderate predictions, which usually look two to six months ahead, are particularly beneficial in debt and deficit reduction, financial risk mitigation, and crucial data visibility. The continuous 13-week cash flow prediction is perhaps the most common medium-term prediction.
  • Long-term projections: Relatively long predictions usually look 6–12 months ahead and are frequently used as the beginning point for yearly financial planning procedures. They’re also helpful in determining the cash needed for lengthy development initiatives and infrastructure investments.
  • Forecasts over many periods: Mixed-period projections combine the three aforementioned periods and are mostly used for capital adequacy. A mixed period prediction, for example, may include weekly projections for about the first three months and then monthly forecasts for the next six months.

Direct forecasting, in general, delivers the highest level of accuracy. Nevertheless, this is mostly wildly inaccurate for annual financial statements longer than 90 days since budgeted and actual data isn’t always accessible beyond that door.

Which Forecasting Method to Choose

Forecasting methods are classified into two types: direct and indirect. The primary distinction is that direct forecasting is based on actual data flow, whereas indirect forecasting is based on the anticipated income statements and balance sheets. 

Direct forecasting, in general, delivers the highest level of accuracy. Nevertheless, this is mostly wildly inaccurate for annual financial statements longer than 90 days since budgeted and actual data isn’t always accessible beyond that door.

Find the Information You May Need for Your Cash Flow Forecast

A straight prediction has the precision and succeeds for the number of corporate objectives forecasts are built to serve. As a result, in this part, we’ll concentrate on where to get accurate cash flow data for your prediction. 

The best place(s) to get working capital data for your prediction is determined by how your company handles its finances. However, much of the real cash flow data you’ll need to develop your projection may be found in savings accounts, contracts current, trade receivables, or your accounting software. 

What you’ll want to get out of those systems is as follows:

  • Your Forecasted Period’s Initial Cash Sum: These are typically depicted out of the most recent and precise representation of current circumstances.
  • Your Anticipated Cash Inputs During the Forecast Timeframe: The significant information collection for your future cash flows comes from sales revenues inside the forecast timeline. Intercompany funding, dividend income, revenues from divestments, and inflows from third parties are all examples of cash inflows to take into account.
  • Your Anticipated Cash Expenditures During the Forecast Timeframe: Wages and salary, rent, investment opportunities, credit transactions, and accrued expenses are recommended. However, you are free to incorporate anything important to your business.

The Benefits of Cash Flow Forecasting

Aside from ensuring that a firm avoids financial shortages and receives a yield on any cash excess, cash flow forecasting assists enterprises in a variety of ways, including:

  • Assisting organisations in getting out of debt quicker than regular: Debt repayments are frequently significant financial withdrawals that must be budgeted. Cash flow forecasting can assist firms in debt in ensuring that they have enough cash available to fulfil such instalments (and any interest payments linked with that debt) on time.
  • Guarantee that firms follow collateral requirements under which they may be held responsible: Debt securities are financial considerations imposed by a creditor on a firm. Some borrowers, for instance, want a firm to retain particular cash balances to verify that it can generate profits enough to make monthly instalments on what it owes. A cash flow prediction can assist businesses in identifying possible cash flow concerns that could lead to a covenant violation, requiring them to pay the remainder of their mortgage in advance upon request.
  • Taking steps for firms to expand more unsurprisingly: When a company grows thru investment, it generally does so at the expense of cash flow. Because cash flow predictions assist firms in more successfully planning their cash surpluses, they also find things simpler to implement a strategic plan in a more consistent pattern.

Save and Spend on Better terms to Smooth Out Your Cash Flow  

You can save up to 30% by getting annual subscriptions using Debite’s financing options, or you can spend on anything and split it into 12 monthly payments. But it is not the only option you will have to benefit the most from your Debite experience regarding controlling your cash flow. For instance, you can benefit from a subscription discount on many different prominent SaaS providers by simply using the services that come with your Debite account.

One dynamic platform, all your financing needs