Analysing a Cash Flow Forecast

Defining Cash Flow Forecast

A cash flow forecast is an estimate of the money expected to flow in (inflow) and out (outflow) of a business over a specific period.
It helps businesses identify potential shortfalls in cash balances and is pivotal for managing liquidity, control, and budgeting.
Inflows can include capital invested, loans, revenues from sales, and interest received.
Outflows may be costs such as wages, rent, raw materials, interest paid and loan repayments.

Forming a Cash Flow Forecast

Cash flow forecasts are made by adding anticipated inflows and deducting projected outflows from the current cash balance.
It is typically laid out in a monthly format showing inflows, outflows, and closing balance.
The closing cash balance of one month becomes the opening cash balance for the next.

Analysing a Cash Flow Forecast

A positive cash flow means inflows are higher than outflows. A negative cash flow signifies the business may run out of cash.
Comparing actual cash flow to the forecast helps monitor business performance.
Trends and anomalies can be identified by comparing cash flow forecasts to actual data over time.

Importance of Cash Flow Forecast

Cash flow forecasts are essential in avoiding liquidity problems and ensuring there is enough cash to cover outgoing expenses.
It informs decisions about immediate and future spending, encouraging businesses to spend wisely and save where possible.
When looking for external funding, potential investors or lenders often require a cash flow forecast to demonstrate the company’s financial health.

Limitations of Cash Flow Forecast

A cash flow forecast is based on estimates and a change in circumstances can make the reality very different.
It is only as good as the data upon which it is based, and incorrect financial data can lead to inaccurate forecasts.
While it can guide financial decision making, it cannot guarantee profitability or growth.

Remember, cash flow forecasts are valuable tools in managing business finances effectively, providing insights to inform strategic decisions. They should, however, be used with caution due to their limitations.