Cash flow forecasts

A cash flow forecast is a projection or estimate of the cash inflows (money coming into the business) and cash outflows (money leaving the business) over a specific future period. It helps a business predict its future cash position and manage its liquidity.

Cash flow forecasting is the process of analyzing and predicting a business's expected cash receipts and payments over a defined timeframe. It's a critical financial planning tool that helps businesses anticipate cash surpluses or deficits.

A cash flow forecast shows the expected movement of cash in and out of the business. It includes:

• Opening Cash Balance: The amount of cash the business has at the beginning of the period.
• Cash Inflows: Projected money coming in (e.g., sales receipts, loan proceeds, investment).
• Cash Outflows: Projected money going out (e.g., payments to suppliers, salaries, rent, loan repayments, taxes).
• Net Cash Flow: The difference between total cash inflows and total cash outflows for the period.
• Closing Cash Balance: The projected cash balance at the end of the period (Opening Balance + Net Cash Flow).

Creating a cash flow forecast involves several steps:

1. Determine the forecasting period (e.g., weekly, monthly, quarterly) and timeframe (e.g., 3 months, 1 year).
2. Identify your opening cash balance.
3. Project your cash inflows, based on expected sales, collection patterns, and other sources.
4. Project your cash outflows, based on expected expenses, supplier payments, loan repayments, etc.
5. Calculate the net cash flow for each sub-period (e.g., week, month).
6. Calculate the closing cash balance for each sub-period (becomes the opening balance for the next).

Software (like accounting systems or dedicated forecasting tools) or spreadsheets (like Excel) are commonly used.

Cash flow forecasts are vital for businesses because they:

• Help identify potential cash shortages before they occur, allowing for proactive measures (e.g., securing financing).
• Highlight potential cash surpluses, enabling strategic decisions about investments or debt repayment.
• Support budgeting and financial planning.
• Are often required by lenders and investors when seeking funding.
• Assist in making informed decisions about expenses, credit terms, and inventory levels.
• Provide a performance benchmark for actual cash flow.

The timeframe depends on the business's needs and stage:

• Short-term (e.g., 1-4 weeks): Very detailed, often daily or weekly, crucial for managing immediate liquidity.
• Medium-term (e.g., 3-12 months): Monthly, useful for operational planning and identifying funding needs for the near future.
• Long-term (e.g., 1-5 years): Quarterly or annually, less detailed, used for strategic planning, major investments, and seeking long-term finance.

Private equity (PE) firms often focus on medium to long-term forecasts when evaluating investments and planning exit strategies.

Cash flow forecasts should be updated regularly to remain accurate and useful. The frequency depends on the timeframe and the business's volatility:

• Short-term forecasts (weeks ahead) should ideally be updated weekly or even daily.
• Medium-term forecasts (months ahead) should be reviewed and updated at least monthly.
• Long-term forecasts (years ahead) can be updated less frequently, perhaps quarterly or annually, but should be reviewed whenever significant changes occur (e.g., major new contract, large investment).

Regular updates based on actual performance improve the forecast's reliability.