Purposes of Cash Flow Forecasts

Cash flow forecasts allow businesses to predict periods where income might be less than expenditure, leading to potential cash shortfalls.
By having this information in advance, a firm can implement measures such as arranging an overdraft, reducing expenditure, seeking additional finance, or speeding up the collection of debts.
Without accurate forecasting, a firm could be unaware of a looming cash flow problem, potentially leading to insolvency.

Cash flow forecasting serves as a useful tool for budgetary control, helping businesses to plan their expenditures based on expected cash inflows.
This can assist in setting targets for sales teams, managing stock control, and determining capital expenditure decisions.
A cash flow forecast helps in ensuring the available resources are used in the most efficient and effective manner.

A well-prepared cash flow forecast can provide valuable data for making strategic decisions, such as investing in a new project or engaging in a merger or acquisition.
It allows a business to assess the potential financial outcome of different scenarios, thus facilitating informed risk management.
If a firm is considering sources of finance, the forecast can provide details on the required repayment amount and its timing.

By comparing the actual cash flows against the forecasts, a business can measure its performance and identify any deviations.
Regular monitoring can help identify patterns and trends, alerting managers to early signs of issues.
This can lead to relevant amendments in budgets, production, and sales targets, assisting in overall better financial management.

A thorough and realistic cash flow forecast can boost confidence amongst stakeholders, including investors, creditors, and employees.
Lenders often require accurate forecasts to assess the capacity of the business to repay loans.
It helps enhance a firm’s reputation for financial prudence and can be beneficial in negotiating with suppliers and creditors.