CASH FLOW FORECAST: Definition & Guide On How To Make Cash Flow Forecast

cash flow forecast
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Predicting your cash position should be a key concern for every business since it allows you to keep track of your cash flow, plan for the future, and make better decisions. At its most basic level, a cash flow prediction can tell you whether you’ll have positive cash flow (more money coming in than going out) or negative cash flow (more money going out than coming in) at any particular moment in time. Having known that let’s consider cash flow forecast examples, benefits, how to make a cash flow forecast and all you need to know.

Cash flow

The cash flow statement, also known as the statement of cash flows, is a financial statement that summarizes the amount of cash and cash equivalents that enter and leave a business.

The cash flow statement (CFS) is a financial statement that shows how successfully a firm manages its cash position, or how well it generates cash to pay debts and support operating expenses. Since 1987, the cash flow statement has been a required feature of a company’s financial filings in addition to the balance sheet and income statement.

The quantity of money that comes in and goes out of a business is referred to as cash flow. Businesses generate revenue from sales and spend money on expenses.

They may also earn money via interest, investments, royalties, and licensing agreements, as well as selling things on credit with the expectation of receiving the money owing later.


The quantity of money that comes in and goes out of a business is referred to as cash flow. Businesses generate revenue from sales and spend money on expenses. They may also earn money via interest, investments, royalties, and licensing agreements, as well as selling things on credit with the expectation of receiving the money owing later.

One of the most essential objectives of financial reporting is to assess the amounts, timing, and uncertainty of cash flows, as well as where they originate and where they go. It is necessary for evaluating a company’s liquidity, flexibility, and overall financial success.

Positive cash flow implies that a company’s liquid assets are growing, allowing it to meet obligations, reinvest in its business, return money to shareholders, pay bills, and offer a cushion against potential financial difficulties. Profitable investments can be taken advantage of by companies with high financial flexibility. They also do better during economic downturns because they avoid the consequences of financial distress.

The cash flow statement, a basic financial statement that reflects on a company’s sources and uses of cash over a specific time period, examine cash flows. It can be used by corporate management, analysts. Also, investors assess how well a firm can generate cash to pay its debts and manage its operating expenses. Along with the balance sheet and income statement, the cash flow statement is one of the most essential financial statements by a firm.

What Is a Cash Flow Forecast

The process of estimating the flow of cash in and out of a business over a set period of time is known as cash flow forecasting. An effective cash flow prediction allows businesses to foresee future financial positions, avoid debilitating cash shortages, and maximize profits on any cash surpluses they may have.

You may reduce the cash buffer required for unplanned expenses and make better use of your company’s spare cash with an accurate cash flow forecast. You can also plan ahead for any anticipated cash deficits and better control FX risk. Furthermore, an accurate and timely forecast can assist raise the forecaster’s profile and reputation among key business stakeholders.

Companies, on the other hand, frequently struggle to precisely anticipate their cash flows. Especially if they operate in multiple countries and currencies. To create an accurate cash flow projection. The forecaster will need to gather accurate, up-to-date data from a variety of sources throughout the company.

How to forecast cashflow

The optimum technique to anticipate cash flow for your firm is determined by your business objectives. The needs of your management team or investors, and the information available inside your organization.

A corporation seeking visibility into quarter-end covenant positions. For example, will require a different forecasting strategy than one managing debt repayments on a weekly basis. Here’s how to go about creating a cash forecasting model, as well as what kind of data you’ll need.

­#1. Determine Your Forecasting Objective

To ensure you see actionable business insights from a cash flow forecast. You should start with determining the business objective that the forecast should support. We find that organizations most commonly use cash forecasts for one of the following objectives.

  • Short-term liquidity planning: Managing the amount of cash available on a day-to-day basis to ensure your business can meet its short-term obligations.
  • Interest and debt reduction: Ensuring the business has enough cash on hand to make payments on any loans or debt they’ve taken on.
  • Covenant and key date visibility: Projecting your cash levels for key reporting dates such as year, quarter, or month-end.
  • Liquidity risk management: Creating visibility into potential liquidity issues that could arise in the future. So you have more time to address them.
  • Growth planning: Ensuring the business has enough working capital on hand to fund activities that will help grow revenues in the future.

The best goal is to develop a prediction around the type of your organization. Businesses with debt, for example, will benefit from developing a cash projection to assist them plan for upcoming payments. Unless they’re also short on cash, they might not need to construct a projection that supports short-term liquidity planning.

#2. Choose Your Forecasting Period

Once you’ve determined the business objective you hope to support it with a cash flow forecast. The next thing to consider is how far into the future your forecast will look.

Generally, there’s a trade-off between the availability of information and forecast duration. That means the further into the future the forecast looks, the less detailed or accurate it’s likely to be. So, choosing the right reporting period can have a big impact on the accuracy and reliability of your forecast.

Here are the forecasting periods we recommend and the business objectives they’re best suited for:

  • Short-period forecasts: Short-term forecasts typically look two to four weeks into the future. Also contain a daily breakdown of cash payments and receipts. As you might expect, short-term forecasts are often best for short-term liquidity planning. Where day-to-day granularity is important to ensure a business can meet its financial obligations.
  • Medium-period forecasts: Medium-term predictions are useful for interest and debt reduction, liquidity risk management. And crucial date visibility because they look two to six months ahead.
  • Long-period forecasts: Longer-term predictions, which look 6–12 months ahead, are frequently to kick the annual budgeting procedures. They’re also useful for estimating the amount of cash needed for long-term growth initiatives and capital projects.
  • Mixed-period forecasts: Mixed-period predictions combine the three periods mentioned above and are widely used to manage liquidity risk. A mixed period prediction, for example, might include weekly projections for the first three months and then monthly forecasts for the next six months.

#3. Choose a Forecasting Method

Direct and indirect forecasting are the two main types of forecasting methodology. Direct forecasting employs real flow data, whereas indirect forecasting depends on predicted balance sheets and income statements.

The cash flow forecasting window you choose above, as well as the type of data you have available to develop your forecasting model. The influence which forecasting approach you to use.

#4. Source the Data You Need for Your Cash Flow Forecast

Direct forecasting has the highest accuracy and is suitable for the majority of business objectives for which predictions are. As a result, in this section, we’ll concentrate on where to find actual cash flow data for your prediction.

The best place(s) to get cash flow data for your prediction is by how your company handles its money. However, the majority of the real cash flow data you’ll need to generate your projection can be in bank accounts, payables, receivables, or the accounting software you’re using.

Here’s what you’ll want to pull from those systems:

  • You are opening cash balance for the forecasting period: This is normally from the most up-to-date and accurate reflection of current positions.
  • Your cash inflows for the forecasting period: The major source of data for your cash inflows is usually receipts from inside the forecasting period. Intercompany funding, dividend income, revenues from divestments, and inflows from third parties are all examples of cash inflows to consider.
  • Your cash outflows for the forecasting period: Wages and salary, rent, investments, bank charges, and debt payments are all items that should be recorded. However, you are free to incorporate anything that is important to your company.

Benefit of cashflow forecast

Financial flow forecasting not only helps organizations avoid cash shortages and gain a return on any cash surpluses. But it also helps them prosper in other ways, such as:

#1. Helping businesses get out of debt faster

Debt repayments are frequently huge cash expenditures that must be anticipated. Cash flow forecasting can help firms who are in debt make sure they have enough cash on hand to make all of their payments (and any interest payments) on time.

#2. Ensuring businesses adhere to debt covenants they may be accountable for

Debt covenants are financial constraints by a lender on a company. Some lenders, for example, require a company to maintain particular cash levels. In order to verify that it is financially sound enough to make timely payments on its debts. A cash flow prediction can assist firms in identifying potential cash flow concerns that could lead to a covenant violation. Requiring them to pay the remainder of their loan in full on-demand.

#3. Enabling businesses to grow more predictably

When a company expands through investment, it usually does so at the expense of cash flow. Cash flow predictions make it easier to implement a growth strategy in a more predictable manner since they let businesses plan their cash surpluses more effectively.


Cash flow forecasting can assist businesses in more accurately forecasting their future cash flows. To deliver rapid and accurate near-real-time projections, sophisticated cash forecasting solutions can employ both live. Also, historical data on the company’s payables and receivables, as well as technology like machine learning. Not only current purchase orders, payables, and receivables may be also behavioural trends such as invoice approval times.

Companies can use visualization tools to rapidly and easily interpret forecasts, making business decision-making easier. Furthermore, cash forecasting systems that interact smoothly with the company’s ERP instances around the world can help to alleviate the issues of getting data from several sources.


What should a cash flow forecast include?

There are three key elements to include in a cash flow forecast: your estimated likely sales, projected payment timings, and your projected costs.

What is a good cash position?

In general, a stable cash position means the company can easily meet its current liabilities with the cash or liquid assets it has on hand. Current liabilities are debts with payments due within the next 12 months.

Why is poor cash flow bad?

If you don’t have cash in hand, you may be forced to take on additional loans or make late payments. This can lead to late payment fees on utilities or debts. Additionally, your late payments negatively affect your business’ credit rating and impact your ability to get credit account privileges and loans in the future.

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