What is Cash Flow Forecast?
Cash flow forecasting involves the estimation of the cash flow in and out of a company over a period of time.A cash flow forecast is a way for companies to predict their cash position in the future, avoid cash shortages that can lead to financial ruin, and maximize any cash surpluses.
A company’s finance department is responsible for forecasting the cash flow department.However, forecasting requires input from many stakeholders and data sources in a company, especially larger ones.
This is how you can create a cash flow forecast to give your company the visibility it requires to use its cash efficiently.
The purpose that Cash flow forecast will serve you
It is a company’s top priority to predict its cash position. As a result, they can keep track of their cash flow, plan for the future, and make informed decisions. A cash flow forecast will tell you whether you will have positive cash flow (meaning that more money is coming into your business than it is going out) or negative cash flow (meaning that more cash is leaving the company than is coming in) at any given time.
With a precise cash flow forecast, you can reduce the cash buffer required for unexpected expenses and make more of your company’s cash reserves. It is possible to plan for cash shortages in advance and better manage FX risk. A timely and accurate forecast can also help to boost the reputation of the forecaster with key stakeholders.
Companies often have difficulty forecasting their cash flows accurately, especially if they operate in multiple countries or currencies. Forecasters will need accurate and current information from many sources in order to create a cash flow forecast. This presents many challenges, including:
- It’s time. Especially if it is based on spreadsheets or requires manual data collection, forecasting can be a time-consuming and difficult activity.
- Errors. Data inconsistencies and errors in data entry can also be a risk in manual data collection.
Insufficient cooperation from stakeholders. It is possible for internal stakeholders to fail to provide the information in the required format or on time, especially if they don’t understand the importance of the forecast.
- No forecasting tools. Forecasters should be able to create a forecast once all data has been collected. But it can be difficult without the right tools.
Companies should look at how to improve data collection and use technology to increase the accuracy and timeliness in their forecasts.
Forecasters must ensure that all people involved in the forecasting process understand the importance and detail required. Executive sponsorship is another important consideration. If senior management is willing to forecast, stakeholders will be more inclined than ever to participate in it.
Understanding that forecasting doesn’t end with completion of the forecast is important. It is important to monitor the accuracy of cash flow predictions on an ongoing basis, by comparing actual and forecast cash flows. Although forecasts are not always accurate, companies can monitor the accuracy of their forecasts to identify areas that need improvement. In order to address deviations, a feedback loop must be established.
Why is it important?
Planning cash flow is crucial. To pay your bills, you must have enough money in the bank. By keeping track of your cash flow and knowing when you will run out, you can plan ahead. There may be a need to lower overheads and make new investments. You might also need to spend more on sales.
It is possible that you are also doing well and are thinking about expanding your business or buying new products. Preparing accurate cash flow projections will help you determine if you have enough cash flow to make this leap.