What is a Cash Flow Statement Template and Do You Need One?
Business Advisory Service
21 June 2021

What is Cash Flow Forecasting?

In a nutshell, cash flow forecasting is a way of estimating the flow of cash coming in and going out of your business over a given period of time. Cash flow forecasts provide you with the most robust, accurate, and real-time predictive data that will help you spot cash fluctuations in advance and make intelligent business decisions.

You can use a cash flow statement template to track your past, present, and future income and expenses, giving you the insights, you need. It will typically look at incomings, outgoings, loans, sales, expenses; every penny passing through your business for whatever reason should be included in your cash flow forecast.

How Can It Help Your Business?

Cash flow forecasting is an important tool for business planning. It allows you to better understand your cash flows and prepare for potential problem areas. Here are some of the many ways cash flow forecasts can help your business:

  • Understand the Impact of Future Plans – Cash flow forecasting can help business owners to understand how different situations will impact their cash flow in the future, which is an important part of business planning. Using scenario planning to answer “what if scenarios” helps you develop strategies to navigate extreme events that you might encounter in the future.
  • Plan for Cash Shortage – An effective forecasting process serves as an early warning sign to your business’ future health by keeping an eagle eye on cash balances under a variety of future circumstances. This allows you to make more informed decisions around tax, new purchases or securing a business loan.
  • Get the Full Picture of Your Finances – Cash flow forecasting can help you accurately predict the future financial health of your business and get highly visual, easily understood, real-time reporting containing relevant ratios, charts, and graphs.
  • Manage Surplus Cash – Cash flow forecasts help you know that they have surplus cash in the bank. Also, it tells them when and where the surplus can occur, which means that they can better plan for what to do with the extra cash.
  • Tells How Much Financing You Can Afford – Cash flow forecasting helps you visualize where you stand in terms of financing. It can tell you how well you’re managing your existing debt. And if you need additional funds, it shows how much new financing you can afford.

Goals of Cash Flow Forecasting

The main goal of cash flow forecasting is to help manage liquidity and ensure sufficient cash is there to meet your business’ day-to-day and other short-term expenses and avoid funding issues, ultimately better management of working capital.

Here are some other objectives of cash flow forecasting

  • Measurement of cash
  • Interest and debt reduction
  • Generating inflow of cash
  • Analyse and interpret its various activities such as operating, investing, and financial
  • Improve financing decision by forecasting the future cash flow
  • Assessing liquidity and solvency position
  • Helping management to ascertain cash planning

How To Measure Cash Flow?

Although there are several methods to measure cash flow, these three cash flow formulas make it easier to predict future financial health and better understand how cash is coming in and going out of your business.

  • Free Cash Flow Formula

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure

  • Operating cash flow formula

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital

  • Cash flow forecast formula

Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

Methods of Cash Flow Forecasting

The two most sought-after methods of cash flow forecasting are direct and indirect cash flow forecasting. Cash flows and balances are forecasted for short-term liquidity management in the direct sale forecasting and vice versa. The time horizon is short-term (less than 90 days) indirect while longer-term in indirect cash flow forecasting.

Direct cash flow forecasting shows the cash required to fund working capital while indirect cash flow forecasting shows cash required to fund longer growth strategies and capital projects. The direct method includes all types of transactions including credit and cash transactions as well as bills, invoices, and tax. The indirect method uses the balance sheet and profit and loss statements to predict cash flow.

Management of a Cash Flow Forecasting

Remember, without cash, profits are meaningless. In the current situation, it’s critical for you to manage your cash flow. If you can’t manage your cash flow within the first year, there’s a chance you might not survive past the second year.

Here are some smart tips to fix your business’ cash flow problems:

  • Leverage cash flow forecasting and management software and apps that help you seamlessly create a scenario, estimate the money you expect to flow in and out, and see what your future cash position would look like, so you can make better financial decisions and plan for potential problems before they cause a cash crisis.
  • Improve your accounts receivable collection so you can take control and close the gap between invoicing and payment. To speed up your invoicing, invoice as early as possible, offer discounts and deals to customers, keep terms short and simple, keep payment options flexible and keep the design of invoices neat and clean.
  • Delay your accounts payables by cutting off unnecessary expenses, buying used equipment, bartering products, reducing debt, cutting staff expenses, and sticking to a budget.
  • Consider adequate short-term financing such as a line of credit, invoice financing, and factoring, and other working capital loans that can be used to make important purchases or to bridge the gap between payables and receivables.

Build Out Different Cash Flow Scenario Models Process

In business, the best way to face uncertainty is to be prepared with the information needed to effectively respond to potential situations. Cash flow scenario models are the process of planning for critical uncertainties that may affect your business’s cash flow in the future. It is created by modelling different hypothetical situations to see how these may affect your business’s future cash flow.

What if you would purchase a business loan? What if you would hire more staff? What if you would open a new office? With cash flow scenario models, you can evaluate different situations and predict their effect on your business goals and future cash flow. You could also create the best case, moderate case, and worst-case scenario models to see their impacts on your business’s cash flow.

Understanding Cash Flow Forecasting Challenges

Although cash flow forecasting has numerous benefits, it comes with its own set of challenges. Here are some common challenges you might face when developing cash flow forecasts.

  • Uncontrollable External Factors: Government regulations, recessions, a slow economy, and a pandemic are some of the many external factors that might impact expected cash flow. It’s important for you to adapt and adjust to these uncontrollable factors.
  • Incomplete and Inaccurate Data: The success of your cash flow forecast mainly depends on the quality of financial data and bookkeeping reports. If you make some typo error or forget to update your books, then you can’t create the right cash flow forecast.
  • Manual Administration: Cash flow forecasting involves numerous financial data entry and transactions, managed using spreadsheets, can result in significant amounts of manual administration. These manual processes can contribute to human errors and eventually incorrect cash flow forecasting.

Tips to Forecast Cash Flow

  • Forecast your income or sales weekly or monthly. You can make adjustments to your income or sales based on whether it increased, decreased, or stayed the same.
  • Estimate cash inflows – cash from operations, cash from investing, and cash from finances.
  • Estimate cash outflows – loan repayments, invoice payments, and other bills and expenses.
  • Compile the estimates into your cash flow forecast
  • Review your estimated cash flows against the actual

Keep Your Forecasts Up to Date

Although keeping your cash flow forecast up-to-date is a challenging and time-consuming endeavour, it’s vital for accurate prediction. If you ignore it, your numbers are immediately wrong. So, it’s important to keep your forecasts up-to-date by building them weekly. Regular cash flow forecasts help you enhance understanding of customers and suppliers, help businesses understand the cost of growth, reduce the cost of capital and increase communication with other departments. Doing a little more reviewing can sometimes be the key.

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