What is a cash flow forecast?

A cash flow forecast is one of the most important financial planning tools an organization can create. The definition of a cash flow forecast is a plan that shows you how much money your organization expects to receive and pay-out over a given period in the future. It’s developed from historical averages and consists of projected income and expenses. As a result, the cash flow forecast predicts cash-in and cash-out to give you a more precise understanding of your solvency than, say, merely looking at your bank account balance. Your bank account might show you what’s happening right now, but it lends no insight into what’s happening tomorrow.

Why are cash flow forecasts important to a business?

Cash flow forecasts help you understand if your organization has enough working capital on hand to operate, while paying bills and meeting debt obligations. In other words, cash flow forecasts help you plan how much cash you’ll need in the future. By manipulating operational drivers or playing out various business scenarios — like promotions, big deals, or a dip in sales — you can use the cash flow forecast to predict periods of high or low liquidity and determine times when you’ll need more cash on hand.

What are cash flow forecasts used for?

Cash flow forecasts are an incredible tool for understanding how much cash will have at a certain point of time and identifying your future cash needs.

You can use cash flow forecasts to:

  • Understand which areas of your business are over or under performing
  • Predict periods of high or low liquidity 
  • Identify funding needs, like a loan or alternative financing 
  • Prepare and understand seasonality fluctuations 
  • Make sound long-term or capital purchases
  • Sound the alarm when unexpected events occur
  • See how changes to your financial position now affect cash flow later 
  • Make operational decisions, whether that’s adding to your workforce or pursuing a new product line 
  • Evidence of growth potential when applying for financing
  • Reduce operating costs
  • Understanding how scenarios derived from changing business climates could affect your business

In essence, there's a lot you can do with your cash flow forecast. It's a predictive report that has a ton a strategic value. By playing out business scenarios — whether financial or operational, best case or worst case — on your cash flow forecast, you can better predict your that scenario's cash impact. If you can identify a surplus of cash or a shortage on the horizon, you can then plan to welcome — or circumvent — that outcome.

At the end of the day, cash flow forecasting helps you avoid insolvency. In other words, running out of cash in a scenario where liabilities exceed assets, debt overtakes revenue. For most, this means turning the lights off — likely not a situation you want.

How do cash flow forecasts work?

Cash flow forecasts use three elements to help you manage your cash.  

What You Expect to Sell: Projected Sales (Or Cash In)

Pivotal to your cash flow forecast is an estimated projection of sales that spans the length of your given time horizon, e.g., 30, 60, 90, 180 days. You should derive projected sales from averages in your sales history over time and consider impacting factors, like seasonality, cash injections, promotions, and holidays.

When You Expect to Sell it: Projected Payments

The cash flow forecast should also include an estimate of when you expect to receive cash-in and how long it will take to turn the cash into usable funds.

What You Expect to Spend: Projected Costs

An estimate of both fixed (rent, salaries, leases, insurance, depreciation, and other recurring overhead), variable costs (materials, supplies, and other costs that fluctuate based on sales and production), and intermittent expenses (dividends, business trips, capital purchases, training.)

What are the capabilities of cash flow forecasting software?

Best-in-class cash flow forecasting software uses the combination of automation, a central data source, and in-memory data processing to produce near-real time cash flow forecasts based on a single version of the truth.

Your cash flow forecasting software should

  • Automatically produce average monthly averages and projections for you 
  • Connect historical data, bank statements, financial data, and operational data in a single source
  • Allow you to use direct and indirect cash flow reporting methods
  • Quickly reconcile your balance sheet accounts
  • Indicate variances between projections and actuals
  • Use in-memory data processing to update numbers in near real-time
  • Have built-in modeling functionality that enables you to project collections, payment deferrals, credit or debit schedules, taxes, and cash pooling
  • Vary financial policy rules like DSO (Days Sales Outstanding), DPO (Days Payable Outstanding) or credit terms by any dimension
  • Automated deviation analysis
  • Double entry logic
  • Play out what-if scenarios, create simulations, and preview the impact of changing cash drivers on the P&L, balance sheet, and cash flow statement
Discover how CCH Tagetik Performance Management Software delivers:
Cash Flow Analysis