Cash Flow Forecasts in Practice

Preparation of Cash Flow Forecasts

When creating a cash flow forecast, it’s essential to include various variables that can influence cash inflows and outflows. These may include seasonal variations in sales, the credit terms given to customers, and the regularity of income and expenditure.
A company must take into account the timing of cash inflows and outflows. For instance, inflows from customer payments may occur 1-2 months after the sale if they are on credit. Likewise, payment for raw materials may be delayed due to supplier credit.
Depending on the business type, further variables could come into play. For instance, businesses in certain sectors may need to consider the effects of economic cycles on their cash flow.

The reliability of a cash flow forecast is greatly dependent on the accuracy of its assumptions. These can include sales forecasts, timing of collections and payments, and anticipated changes in cost structures.
It can be useful to prepare several versions of a forecast based on different scenarios, e.g., a ‘best case’ and ‘worst case’ scenario. This allows for better risk management and strategic planning.
It’s essential to frequently review and adjust the assumptions to maintain the relevance and reliability of the forecast.

Regularly comparing actual figures to the forecast can help a business track its performance and pinpoint any discrepancies. These variances can then be analysed for their causes.
Corrective actions can be taken quickly if actual cash flows stray from the forecast. These might include cost reduction measures, renegotiation of credit terms, or sourcing additional finance.
The forecast should be viewed as a dynamic tool that needs ongoing adjustments to remain relevant. As circumstances change, so should the forecast.

Cash flow forecasts can provide valuable insight for stakeholders, painting a picture of the organization’s financial health. This can help build confidence, especially amongst lenders and investors.
Internally, cash flow forecasts can guide teams towards meeting financial goals, fostering accountability and aiding in decision-making processes.
It can also facilitate dialogues between departments, enhancing cross-functional collaboration and awareness.

Cash flow forecasts can aid businesses in identifying potential risks and weak spots in their financial planning. This allows for condition simulation and the implementation of risk mitigation strategies.
Additionally, it allows a business to assess its liquidity position. A consistently low balance despite high sales may indicate an issue with collections or payments, signifying a need for further analysis.

Cash flow forecasts can provide vital details on a firm’s capacity to finance new projects. If the forecast indicates surplus cash, it may justify investing in new ventures or capital assets.
Conversely, a forecast predicting tight liquidity may encourage a business to postpone investments until the situation improves, thus preventing financial distress.