Cash flow forecasts

What is a Cash Flow Forecast?

A cash flow forecast is a document that presents estimated inflows and outflows of cash in a business over a specific period of time.
It is a management tool used to predict the availability of cash in the business in the future.
This forecast can help identify periods of negative cash flow, where outgoing money exceeds incoming money, and periods of positive cash flow.

Inflows: These are the sources of cash coming into the business - sales income, sale of assets, investments, loans, etc.
Outflows: These are the expenses or payments going out of the business - raw materials, wages, rent, utilities, loan repayments, etc.
Net cash flow: This is calculated by subtracting the outflows from the inflows.
Opening balance: The amount of cash available at the start of the period.
Closing balance: Calculated by adding the opening balance to the net cash flow. This will be the opening balance for the next period.

Cash management: A cash flow forecast can predict when the company might run low on cash which would help the business to manage their cash properly and prevent insolvency.
Risk management: It helps in identifying potential dry spells and enables businesses to prepare in advance.
Investment decisions: It provides a financial overview that can inform and support important business decisions such as investments or expansions.
Lender and investor confidence: Sharing forecasts with potential investors and banks can increase their confidence in your business’s financial management.

Predictive, not accurate: Cash flow forecasts predict future cash flows based on assumptions and past data, they’re not always 100% accurate.
Changes in market conditions: Unpredictable events such as changes in the economy or a sudden change in demand for a product can make the forecasts inaccurate.
Requires time and knowledge: Producing an accurate cash flow forecast requires a good understanding of the business and its financial situation, which not all business owners may have.