Do you know the formula for calculating cash flow forecasts?
It's beginning cash plus projected inflows minus projected outflows equals ending cash.
Cash flow forecasting is the practice of estimating the flow of cash in and out of a firm over a specified period.
Businesses can forecast future financial positions, avert crippling cash shortages, and maximise revenues on any cash surpluses they may have with accurate cash flow forecasting.
Cash flow forecasting is responsibility of a company's finance department. However, in larger companies, the process of generating a prediction involves input from a variety of stakeholders and data sources.
The most prevalent source of cash flow is money earned from sales. Loan repayments, the sale of non-essential assets, refunds, and grants are all possibilities.
Table of contents
- What is cash flow forecasting?
- What is a cash flow forecast's purpose?
- What is the best way to forecast your cash flow?
- Select a Forecasting Technique
- Profits aren't the same thing as cash flow
- It's all about cash flow management.
- How Can Automation Help With Cash Flow Forecasting?
What is cash flow forecasting?
Cash flow forecasting, often known as cash forecasting, is a means of predicting the movement of cash into and out of your company over a certain period and across all areas.
A Cash Flow Forecasting shows how much money you'll have depending on your revenue and expenses, and it's a crucial tool for making funding, capital expenditures, and investment decisions.
Cash Flow Forecasting can be done for a range of periods. A short-term cash forecast can be used to identify any impending financial needs or excess funds during the following 30 days.
Depending on the nature of the company, a medium-term Cash Flow Forecasting might look at sales and purchases for the next month to a year, while a long-term forecast might look at sales and purchases for the following year to five years or even longer.
The longer the time horizon of a cash flow prediction, the less accurate it is expected to be.
What is a cash flow forecast's purpose?
Predicting your cash position should be a top priority for any company since it allows you to monitor your cash flow, plan for potential cash flow concerns, and make better decisions.
Cash Flow Forecasting, at its most basic level, 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 given time.
With an accurate cash flow prediction, you can lower the cash buffer required for unanticipated expenses and make better use of your company's surplus cash.
You can also plan for any potential cash shortages and better manage foreign exchange risk. Furthermore, a precise and timely forecast might help the forecaster increase his or her profile and reputation among key business players.
Companies, on the other hand, often have difficulty accurately forecasting their cash flows, particularly if they operate in many countries and currencies.
Cash Flow Forecasting will need to acquire accurate, up-to-date data from a variety of sources throughout the organisation to develop an accurate cash flow projection.
To address these difficulties, businesses should assess how they can improve the data collection process and employ technology to increase the accuracy and timeliness of the resulting prediction.
To make the cash flow forecasting process easier, the forecaster must make sure that people who must provide information understand the forecast's importance and the level of detail required.
Another thing to think about is whether or not you need executive sponsorship. If senior management shows great commitment to the forecasting process, stakeholders are more likely to interact with it, and the prediction is more likely to provide value.
It's also important to remember that predicting doesn't stop once the forecast is live. By comparing anticipated and actual cash flows, the accuracy of a cash flow prediction should be verified regularly.
While few forecasts will be 100 per cent accurate, tracking the forecast's accuracy allows the company to find areas where it can improve. There should also be a feedback loop in place so that any deviations may be addressed appropriately.
What is the best way to forecast your cash flow?
Cash flow forecasting includes estimating future income and expenses.
A cash flow prediction is a crucial tool for your business since it tells you if you'll be able to keep it running or expand it. It will also show you when the company is losing money faster than it is making.
Follow these steps to create your cash flow projection. As a starting point, you can utilise our template.
Because cash flow is all about timing, when creating your projection, try to be as accurate as possible with your inflow and outflow estimates.
Calculate the amount of money you'll make or the amount of money you'll sell.
To ensure that a cash flow forecast provides useful business information, start by determining the business purpose that the forecast should support. According to our study, cash predictions are most commonly utilised for one of the following goals.
To begin, pick a time frame for your forecast. The majority of consumers want to be billed every month.
Examine the prior year's figures to see if there are any patterns you can use to forecast your sales. You can adjust your sales forecast based on whether sales increased, decreased, or remained unchanged.
Start by estimating all of your cash outflows if you're beginning a new business and don't have any previous sales data.
This will provide you with an estimate of how much money the business will require to meet the expenditures.
Decide the duration of cash flow
Cash flow forecasting might take anywhere from a few weeks to several months. You should plan as far ahead as you can with confidence.
You may have a reliable sales pipeline and historical data if your organisation is well-established. If you're a new business, you might not have a lot of data, therefore your projections will be less accurate as time goes on.
Don't be too concerned if you can't plan far ahead. Your projected cash flow will likely change over time. It should. As circumstances change or more precise estimates become available, you can adjust your strategy for cash flow forecasting.
Make a list of all of your earnings
In your cash flow projection, list all of the money you have coming in for each week or month. Each week or month should be represented by a separate column, and each source of revenue should be represented by a separate row.
Begin by categorising your sales by week or month. You might be able to forecast this if you know the figures from previous years.
However, keep in mind that this refers to the time the funds arrive in your bank account. When you know your clients will pay their invoices or your bank payments will clear, enter the numbers.
Calculate cash inflows
After that, you'll calculate your cash inflows, or cash sources other than sales. The sort of organisation determines the ideal goal for developing a prediction around.
Businesses that are in debt, for example, will benefit from creating a cash projection to help them budget for future payments. They might not need to build a prediction that supports short-term liquidity planning unless they're likewise cash-strapped.
Calculate the cost of making items available when calculating your cash outflows. It will be easy to change the actual cost of goods sold later if you need to adjust your sales numbers.
Expenses might include money spent on operations or administration. These will also be determined by the type of company.
Estimates should be incorporated into your cash flow forecasting. Because cash flow forecasting is all about timing and cash flow, you'll need to start with an opening bank balance, which is your actual cash on hand.
Then sum up the cash inflows and subtract the cash withdrawals for each quarter. The entire amount after each period is the closing cash balance. This is the cash balance at the start of the next period.
The next item to consider is how far into the future your cash flow forecasting will look once you've identified the business target you plan to support with it.
In general, there is a trade-off between information availability and forecast duration. That means that the longer the forecast is, the less comprehensive and precise it will be.
As a result, selecting the appropriate reporting period can have a significant impact on the accuracy and consistency of your forecast.
The following are the cash flow forecasting periods we recommend, as well as the business goals they're most suited for:
These forecasts are typically two to four weeks in length and include a daily breakdown of cash payments and revenues.
Short-term predictions are frequently best suited for short-term liquidity planning when day-to-day granularity is critical to guarantee a corporation can meet its financial obligations, as you might imagine.
Medium-term forecasts are beneficial for interest and debt reduction, liquidity risk management, and crucial date visibility because they look two to six months ahead. The rolling 13-week cash flow prediction is the most typical medium-term forecast.
Longer-term forecasts look 6–12 months ahead of time and are frequently used to kick-off annual budgeting processes. They're also useful for estimating the amount of cash needed for long-term growth initiatives and capital projects for cash flow forecasting.
These forecasts 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.
Select a Forecasting Technique
Direct and indirect cash flow forecasting are the two main types of forecasting methodology.
Direct cash flow forecasting employs real flow data, whereas indirect forecasting depends on predicted balance sheets and income statements.
In general, direct cash flow forecasting produces the most accurate outcomes. However, because actual cash flow data is rarely available beyond that time frame, it's unreliable for reporting periods longer than 90 days.
Collect all of the data you'll need for your cash flow prediction. Direct cash flow forecasting is the most accurate and is appropriate for the majority of business goals for which projections are made.
As a result, we'll focus on where to find actual cash flow data for your cash flow forecasting in this part.
How your organisation manages its money determines the best source to acquire cash flow data for your forecast.
Much of the real cash flow data you'll need to create your prediction can be found in bank accounts, payables, receivables, or your accounting software.
Compare your projected cash flows to the actual cash flows
After you've completed your cash flow forecasting, double-check your assumptions against the actual cash flows for the period.
This will emphasise any disparities between the estimated and actual cash flow, allowing you to understand why your cash flow fell short of your expectations.
If you don't think you'll be able to keep your firm afloat, you can take action to increase your cash flow
Profits aren't the same thing as cash flow
Profitable businesses can run out of cash if they don't keep track of their finances and manage their cash flow as well as their profits.
For example, your company may spend money that does not appear on your profit and loss account as an expense. Your profit margins are lowered as a result of normal expenses.
However, certain spending, such as inventory purchases, debt payments, new equipment, and asset purchases, affects your cash flow but not your profitability. As a result, your company can spend money while still appearing profitable.
On the sales side, your company may complete a sale to a consumer and issue an invoice, but not receive payment straight away.
That transaction increases your profit and loss statement's income, but it doesn't appear in your bank account until the customer pays you.
This is why a cash flow prediction is crucial. It enables you to forecast how much money you'll have in the bank at the end of each month, regardless of how profitable your company is.
Cash Flow Forecasting's Advantages
Cash flow forecasting not only helps organisations avoid cash shortages and gain a return on any cash surpluses, but it also helps them prosper in other ways, such as:
Assisting firms in getting out of debt more quickly: 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.
Ensure that enterprises comply with loan covenants for which they may be held liable: Debt covenants are financial constraints imposed by a lender on a company.
Some lenders, for example, require a company to maintain particular cash levels to verify that it is financially sound enough to make timely payments on its debts.
Cash flow forecasting 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.
Increasing the predictability of corporate growth: When a company expands through investment, it usually does so at the expense of cash flow.
Cash flow forecasting make it easier to implement a growth strategy more predictably since they let businesses plan their cash surpluses more effectively.
You need cash in the bank to pay your bills, therefore cash flow forecasting is critical. Keeping track of your cash flow will allow you to identify if and when you'll run out of money.
On the other hand, you might be doing well and thinking of expanding into new areas, investing in new goods, moving to larger facilities, or hiring additional employees. Accurate cash flow forecasting will allow you to determine whether you can afford to take the risk.
Cash receipts forecasting
The Cash from Operations section of your cash flow forecast is this. When you sell your products and services, some customers may pay you in cash straight away.
This is the cash sales row in your spreadsheet. You get the money right away and can deposit it into your bank account.
New loans and investments in your company are available. You can also get cash by taking out a new bank loan or making an investment. When you get this kind of money, you'll record it in the loan and investment rows.
It's important to keep these two sorts of financial inflows separate from one another, primarily because loans must be returned while investments do not.
Assets are sold.
Assets owned by your company include vehicles, equipment, and real estate. When you sell an asset, you'll usually get paid, and you'll track that money in the Sales of Assets column of your cash flow forecasting.
On your cash flow statement, for example, the proceeds from the sale of a truck that your company no longer needs would appear.
Other taxes on income and sales
Aside from sales, businesses can generate revenue in a variety of ways. For example, the money in your business's savings account may generate interest income.
It's all about cash flow management
You should be able to forecast cash flow using informed assumptions based on a thorough understanding of your company's sales, credit sales, receivables, inventories, and payables flows.
These are very useful forecasts. Real management, on the other hand, keeps track of projections every month using a plan vs actual analysis so that changes can be caught early and managed.
A solid cash flow forecasting will show you when cash will run out in the future so you can plan accordingly.
It's usually best to plan ahead of time so you can set up a line of credit or get additional funding to help your company weather periods of poor cash flow
How Can Automation Help With Cash Flow Forecasting?
Large corporations frequently devote a significant amount of time and effort to cash flow forecasting at both the corporate and company levels.
However, the majority of that time is spent on low-value tasks such as data collecting and spreadsheet manipulation rather than high-value tasks such as extracting relevant insights from their data.
Without spreadsheets, no finance or treasury function could work. However, automating the entire cash flow management process can save you up to 90% of the time it takes to generate and assess a forecast using a spreadsheet.
To manage your costs and expenses you can use many available online accounting software.
How Can Deskera Assist You?
Deskera Books can help you automate your accounting and mitigate your business risks. Creating invoices becomes easier with Deskera, which automates a lot of other procedures, reducing your team's administrative workload.
- Businesses can forecast future financial positions, avert crippling cash shortages, and maximise revenues on any cash surpluses they may have with accurate cash flow forecasting.
- To make the cash flow forecasting process easier, the forecaster must make sure that people who must provide information understand the forecast's importance and the level of detail required.
- Companies, on the other hand, often have difficulty accurately forecasting their cash flows, particularly if they operate in many countries and currencies.
- Cash flow forecasting might take anywhere from a few weeks to several months. You should plan as far ahead as you can with confidence.
- Direct cash flow forecasting employs real flow data, whereas indirect forecasting depends on predicted balance sheets and income statements.
- After you've completed your cash flow forecasting, double-check your assumptions against the actual cash flows for the period.
- Much of the real cash flow data you'll need to create your prediction can be found in bank accounts, payables, receivables, or your accounting software.
- Cash flow forecasting make it easier to implement a growth strategy more predictably since they let businesses plan their cash surpluses more effectively.
- Large corporations frequently devote a significant amount of time and effort to cash flow forecasting at both the corporate and company levels.