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# Cash Flow Forecast

Cash is the life and blood of a business. Without enough cash, companies cannot pay for their daily operations, possibly ending in business failure. One tool that helps businesses maintain sufficient operating capital is the cash flow forecast. What are cash flow forecasts? How can they help a company sustain itself and grow? What information is needed to create a cash flow forecast? In this explanation, you will find out.

## Cash flow forecast definition

One of the most important tools for allowing businesses to prepare and plan for the future is the cash flow forecast.

Cash flow forecasts are predictions of a business’s net cash flow over a future period.

Specifically, cash flow forecasts estimate the amount of cash going into or out of a company:

• The amount of money going into a business is called cash inflow, e.g. sales revenue.

• The amount of money going out of a business is called cash outflow, e.g. raw materials purchases, interest payments, rent.

Net cash flow is cash outflow minus cash inflow:

• Negative cash flow happens when the company has more money flowing out than flowing in. This indicates a high chance of future cash shortage.

• Positive cash flow occurs when the company has more money flowing in than flowing out. This shows the business is more able to meet its operations needs and buffer against financial challenges.

To better understand cash flow forecasts, let’s look at a company's projected cash flow during the October - December 2022 period:

 £ October 2022 November 2022 December 2022 Beginning cash 10,000 20,000 15,000 Cash inflows 25,000 30,000 25,000 Cash outflows 15,000 35,000 20,000 Net cash flow 10,000 -5,000 5,000 Ending cash 20,000 15,000 20,000

Table 1 - Cash flow forecast example

The beginning cash and ending cash in Table 1 is the amount of cash a company has at the beginning and the end of each month. Note here that the beginning cash of each month is the same figure as the ending cash of the previous month. For example, the beginning cash of November 2022 is the same as the ending cash of October 2022, which is £20,000.

Net cash flow is calculated as cash outflows minus cash inflows:

In the example above, the net cash inflow for October 2022 is £25,000 - £15,000 = £10,000.

To calculate the ending cash of each month, we simply add the net cash flow to the beginning cash:

The cash at the end of October 2022 is 10,000 + 10,000 = 20,000 (£).

### Cash flow statements

A cash flow statement is a financial statement showing sources of a company’s cash flow. It consists of three components: operating cash, investing cash, and financing cash.

Here's a simple example of what a company's cash flow statement might look like:

 Statement of cash flow Cash flow from operating + £10,000 Cash flow from investing - £2,000 Cash flow from financing - £5,000 Net cash flow £3,000

Table 2 - Cash flow statement example

A cash flow statement gives an overall picture of a company’s financial position. From the statement, you can see how much a company earns per year and whether it has enough cash for future operations.

The cash flow statement is different from the income statement and balance sheet in that it does not include non-cash transactions such as depreciation or receivables not yet collected.

To learn more about different types of financial statements, take a look at our explanations on Financial Statements and the Income Statement!

Keeping track of the cash flow statements over the years allows the company to assess its liquidity (the ease of transforming non-cash assets into cash) and solvency (the ability to pay off debts) levels, thus making more accurate cash flow forecasts.

## Why are cash flow forecasts important?

Companies need cash to pay for their day-to-day operations, distribute profits to investors, and overcome unpredictable events. The more cash a company has on hand, the more it is likely to survive harsh market conditions and achieve sustainable growth.

The main objective of cash flow forecasts is to ensure businesses have enough operating capital and are prepared for future cash shortages.

Figure 1 outlines the most common uses of cash flow forecasts:

Fig. 1 - Reasons for Cash Flow Forecasts

• Plan for the future: Future financial predictions help your company to make key decisions such as whether to hire more staff, open a new branch, or expand to a new market.

• Identify cash shortages: Projected cash flow alerts your business to possible future cash shortages and come up with solutions. These may include finding new finance sources or extending bank overdrafts, the credit agreement with a bank that lets the account holder withdraw more money than they have - up to a limit.

• Assess future performance: You can analyse future business performance based on the forecasted cash flow data. A positive future cash flow means that the business will be able to meet daily operations needs and distribute profits to the shareholders, whereas a negative future cash flow indicates imminent financial struggles.

• Predict financial goal accomplishment: Cash flow forecasts show how likely it is for your company to reach its financial objectives. If the predictions deviate too far from the business plan, you may need to change the current strategy or adjust the financial goals.

While making cash flow forecasts is important, companies should not be too dependent on them, as future forecasting can come with both advantages and disadvantages.

### Advantages of cash flow forecast

There are three main benefits of predicting future cash flows:

• Plan for future cash shortages. Practicing prevention is always preferable to looking for a cure. By knowing about possible cash shortages, you can create plans to handle crises before they hit, or avoid them altogether.

• Manage cash surplus effectively. Avoiding cash shortages is one thing, but what do you do in case of cash excess? Being aware of future cash surplus allows you to plan and invest the extra money more effectively.

• Plan for growth - With positive cash flow comes an opportunity to expand your investment portfolio and earn a higher profit. Having cash flow forecasts on hand allows you to recognise opportunities for growth and come up with plans to achieve them.

### Disadvantages of cash flow forecasts

Here are some risks associated with cash flow forecasting:

• Forecasts can be wrong: Running a business is full of uncertainties, as anything can happen in the future. New technology, an economic crisis, or a global epidemic can happen at any point in time and put a company in a difficult position. Thus, at its best, cash flow forecasting is an educated guess. Becoming too dependent on the forecast can make your plans too rigid or inflexible to change.

• You might make bad decisions - A prediction of extra cash flow can motivate you to dive head-first into a new project. Yet, the projection can be wrong and your business might run out of cash before the project is completed. This can put your company in a financial struggle.

• Not enough information: New businesses may lack historical data or research to make accurate cash flow forecasts.

Cash flow forecasts are an effective tool for companies to prepare for future cash shortages and plan for growth and expansion. However, forecasts can go wrong and put the business in a worse-off financial situation. Businesses using cash flow forecasts for planning and decision-making should use the data with care and not become too dependent on them.

## Cash-flow forecasts and statements - Key takeaways

• Cash flow forecasts give information on a business’s net cash flow over a future period.
• To make better cash flow forecasts, a business can make use of historical cash flow statements.
• Cash flow statements give an overview of how well a business is doing, indicating its profitability and available cash.
• Cash flow forecasts help a business plan for the future, identify cash shortages, assess future performance, and analyse its chances of accomplishing a financial goal.
• Benefits of cash flow forecasts include better planning for the future, growth, and more efficient cash surplus management.
• Risks of cash flow forecasts may come from the lack of information and the probability of predictions going wrong.

Cash flow forecasts are predictions of a business’s net cash flow over a future period.

The main objective of cash flow forecasts is to ensure businesses have enough operating capital and are prepared for future cash shortages.

Planning for the future, assessing future performance, predicting future goal accomplishments, and identifying cash shortages are the uses of a cash flow forecast.

The 2 cash flow forecasting models are:

• direct
• indirect

• Plan for future cash shortages
•  Manage cash surplus effectively
•  Plan for growth

• Forecasts can be wrong
• You might make bad decisions
• Not enough information

## Final Cash Flow Forecast Quiz

Question

What is a cash flow forecast?

Cash flow forecast is a prediction of a business’s net cash flow over a future period.

Show question

Question

What is cash inflow and cash outflow?

• The amount of money going in a business is called cash inflows, e.g. sales revenues.
• The amount of money going out of a business is called cash outflow, e.g. raw materials purchases, interest payments, rent.

Show question

Question

What does negative cash flow mean?

Negative cash flows happen when the company has more money flowing out than flowing in. This indicates a high chance of future cash shortage.

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Question

What does positive cash flow mean?

Positive cash flows occur when the company has more money flowing in than flowing out. This shows the business is more able to meet its operations needs and buffer against financial challenges.

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Question

How to calculate net cash flow?

Net cash flow is calculated as cash outflows minus cash inflows.

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What is a cash flow statement?

A cash flow statement is a financial statement showing sources of a company’s cash flow. It consists of three components: operating cash, investing cash, and financial cash.

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What is the formula for calculating cash flow?

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Why does keeping track of cash flow statements over the year important?

It helps to company to:

• Assess its liquidity and solvency
• Predict future cash flows

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Question

What is the main objective of cash flow forecasts?

The main objective of cash flow forecasts is to ensure businesses have enough operating capital and get prepared for future cash shortages.

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Question

Name four uses of cash flow forecasts!

• Plan for the future
• Identify cash shortages
• Assess future performance
• Predict financial goal accomplishment

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Question

What is not an advantage of cash flow forecasts?

Plan for future cash shortages

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How can cash flow forecasts help businesses to plan for the future?

Future financial predictions help your company to make key decisions such as whether to hire more staff, open a new branch, or expand to a new market.

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How can businesses avoid cash shortages in the future?

Find new finance sources or extend bank overdrafts.

Show question

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What are bank overdrafts?

A bank overdraft is a credit agreement with a bank to let the account holder withdraw more money than they have up to a limit.

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Why is cash important for the company?

Companies need cash to pay for their day-to-day operations, distribute profits to investors, and overcome unpredictable events. The more cash a company has on hand, the more it is likely to survive the harsh market conditions and achieve sustainable growth.

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Question

___ are predictions of a business’s net cash flow over a future period.

Cash flow forecasts

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Sales revenue can be qualified as...

cash inflow.

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Which of these qualify as cash outflows?

raw materials purchases

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___ cash flow happens when the company has more money flowing out than flowing in.

Negative

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___ cash flow occurs when the company has more money flowing in than flowing out.

Positive

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Question

Complete the formula.

? = cash outflows - cash inflows

Net cash flow

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Question

Correct the formula.

Net cash flow = cash outflows + cash inflows

Net cash flow = cash outflows - cash inflows

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Question

Complete the formula.

Cash at the end of the month = Net cash flow + ?

Cash at the beginning of the month

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Question

___ is a financial statement showing sources of a company’s cash flow.

A cash flow statement

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A cash flow statement consists of three components: operating cash, investing cash, and...

financing cash.

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Question

In the cash flow forecast, the beginning cash of each month is the same figure as the ending cash of the previous month.

True

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The cash flow statement includes non-cash transactions such as depreciation or receivables not yet collected.

False

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___ is the ability to pay off debts.

Solvency

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