What is Cash Flow Forecasting?

What is Cash Flow Forecasting

What is Cash Flow Forecasting?: The technique of estimating a company’s cash inflow and outflow over a predetermined time period is known as cash flow forecasting.

A precise cash flow prediction enables businesses to estimate their future financial balances, prevent catastrophic cash shortages, and maximize the return on any cash surpluses they may have.

The financial staff of a company is often in charge of forecasting cash flow. However, especially in larger firms, the process of creating a prediction necessitates input from numerous stakeholders and data sources within the organization.

Here’s how to create a cash flow forecast that will offer your business the clarity it needs to manage its cash well.

Forecasting Cash Flow

The most accurate technique to predict your company’s cash flow will depend on your business goals, the demands of your management team or investors, and the information that is readily available within your company.

For instance, a company that wants to monitor debt obligations on a weekly basis will require a different forecasting strategy than one that aims to obtain clarity over quarter-end covenant positions.

Create a Cash Forecasting Model

Here are the steps we advise taking to create a cash forecasting model and the types of data you’ll need to have access to in order to do so.

Building a cash flow forecast is a fairly difficult procedure for big, global companies. If you’re constructing a forecasting procedure for that type of organization.

 Establish Your Forecasting Goals

• Identifying the business purpose that the cash flow forecast should support is the first step to taking meaningful business insights from the forecast.
• We discover that one of the following goals is where firms most frequently employ cash predictions.
• Depending on the type of your organization, you should choose the appropriate target to base your projection on.
• For instance, organizations with debt will benefit from developing a cash projection that aids in their ability to plan for upcoming payments.

Select the Forecast Period

• The next thing to think about is how far into the future your forecast will seem once you’ve chosen the business objective you hope to support with it.
• The availability of information and prediction duration are typically trade-offs. In other words, the prognosis is more likely to be vague or inaccurate the further into the future it is.
• Therefore, picking the appropriate reporting period can significantly affect the precision and dependability of your forecast.

 Select a forecasting technique

The two main categories of forecasting techniques are direct and indirect. The primary distinction between them is the use of real flow data by direct forecasting as opposed to anticipated balance sheets and income statements by indirect forecasting.

• The cash flow forecasting window you chose above and the type of data you have at your disposal to construct your forecasting model will determine which forecasting technique is best.
• In general, direct forecasting gives you the highest level of accuracy. However, it frequently lacks accuracy for reporting intervals greater than 90 days because actual cash flow information is frequently unavailable after that time frame.

 Gather the Information for Your Cash Flow Forecast.

• The bulk of business objectives that firms use forecasts to support can be met with the best accuracy when direct forecasting is used.
• Therefore, in this section, we’ll concentrate on where to find actual cash flow data for your forecast.
• In the end, how your company handles its money will determine the best place(s) to get cash flow data for your prediction.
• However, in general, you may find the majority of the real cash flow information you’ll need to create your projection in your bank accounts, accounts payable, accounts receivable, or your accounting software.