What Is a Cash Flow Forecast? Benefits, Tips, and Example (2024)

Cash flow forecasting is one of the most important jobs of any CFO.

Your company relies on you to ensure that it has positive cash flow (meaning more cash is coming into the business than going out) all year round so that it can pay salaries, fund priorities, and meet its financial obligations on time and in full.

Firms often use cash flow software solutions to make business projections and plan financial resources. Before understanding how that works, let us dive into what cash flow is and why it's important today.

What is cash flow forecasting?

The process of projecting a company's incoming and outgoing flow of cash over a period of time is called cash flow forecasting.

The result of a cash flow forecast is a cash flow report that details how much money you expect to take in and spend over a given period of time. This is a useful tool for determining the best course of action in monetary, capital, and financial matters.

Importance of cash flow projection

Accurate cash flow projection allows companies to estimate their future financial balances, avoid catastrophic cash shortages, and maximize the return on any cash surpluses.

However, accurately predicting your cash flow is a complex matter. Your sales team may close 3 million worth in sales in the first quarter, but it may be another six to twelve months before the company collects that revenue in full. Or your company can make a strategic decision to hire 10 additional sales reps in order to grow your market share, but it can take half a year to recruit and train the new employees and longer for them to sell at full capacity.

Meanwhile, you’ll need the funds to pay their salaries and benefits.Expenses can also be variable, adding many unknowns to your cash flow.For instance, winter is coming. Will it be milder or more severe this year? What will that do to your heating expenses? Will an active hurricane season affect the cost of your raw materials?

The unknowns are the inherent challenge with any kind of forecasting, whether you are an enterprise or a small business. That is why it is vital for firm owners to make business forecasts. This estimates how various natural, economic, political, and seasonal events predict how much cash their company will have on hand 12 to 18 months from now.

Obviously, that’s just not humanly possible.

Cash flow forecast example

Cash forecasting may be done over a variety of time periods. The following example from Taulia illustrates a straightforward one-month cash flow prediction for a firm in January, with net cash flow computed as the difference between total inflows and total outflows.

Opening cash balance	$3,000
Cash inflows
Sales	$15,000
Total inflows	$15,000
Cash outflows
Marketing	$1,000
Raw materials	$8,000
Wages	$4,000
Total outflows	$13,000
Net cash flow	$2,000
Closing cash balance	$5,000

How to improve cash flow

The most accurate technique to forecast your company's cash flow will rely on your business goals, the demands of your management team or investors, and the information that is readily available within your company.

For instance, a firm that wants to monitor debt obligations on a weekly basis would require a different forecasting strategy than one that aims to obtain clarity into quarter-end covenant situations. Debt covenants are financial limitations that a lender imposes on a firm.

Cash flow = cash inflow - cash outflow

Budgeting and forecasting softwareis an indispensable tool if you are looking to forecast for budgeting your business activities. Additionally, below are three steps to keep in mind throughout the entire process.

Benefits of cash flow forecast

In addition to ensuring that a company avoids cash shortages and makes a profit on any cash surpluses, cash flow forecasting also helps businesses succeed in the following ways:

Aiding firms in paying off debt faster. Paying off debt might require significant cash outlays that must be budgeted for. Businesses with debt can use cash flow forecasting to ensure they have enough cash on hand to make the required payments (as well as interest on the debt) on time.
Ensuring companies adhere to debt covenants for which they may be liable. To guarantee that a company is financially stable enough to make payments on its debts on time, certain lenders, for instance, demand that it maintain specified cash levels. A cash flow prediction can assist companies in identifying prospective cash flow problems that could lead to a covenant violation, which could force them to make an immediate full repayment of their loan debt.
Making it possible for firms to develop more predictably.If a corporation is expanding through investment, it often does so at the expense of cash flow. While cash flow projections make it easier for firms to plan their cash surpluses, they also make it simpler to implement a growth strategy in a more predictable way.

Why cash flow forecasts fail

Forecasting cash can feel like an exercise in futility, which is a reason that many CFOs tell us it is one of their primary organizational challenges. Most inaccuracies come from one of three root causes: poor resources, lack of communication, and not having a single forecasting methodology.Let's dive into each below.

1. Poor resources

Robust data is essential for accurate forecasting, but you need the proper tools and resources to both manage and monitor it.If you’re still using tools like Excel to monitor your cash flow, forecasting is infinitely more difficult.

To begin, data is entered manually, which means it’s prone to error. Additionally, it’s difficult to reflect the complexity of how revenue is booked and how expenses flow through a budget in a spreadsheet. There’s no way around it: spreadsheets will hobble your cash flow forecast.

Resources also apply to people. Employees may not have the time for accurate data collection and analysis. For instance, marketing may provide you with its trade show schedule and anticipated expenses, but shows scheduled in the third quarter may require payment in full in the second quarter.

Obviously, this has a huge impact on the accuracy of your forecast and predictive analytics. You can address these variations in reports by creating standard systems and defining how to project expenses and future cash.

The more standard your systems, the more accurate your cash flow forecasts, and the less time is required on everyone’s part!

2. Lack of communication

Inaccurate cash flow forecasts are often the result of poor communication between business segments.Each department may have its own system for collecting and predicting cash flow, each of which may produce entirely different outcomes.

Eliminating silos between stakeholders will deliver better results. It also ensures all decision-makers that their concerns and voices are heard.

Project management software platforms go a long way in eliminating those silos by ingesting and rationalizing data from multiple departments in real-time in order to create and present a common truth.

3. No single forecasting methodology

A common challenge to accurate cash flow forecasting is the lack of a standard system or methodology used throughout the organization.

This doesn’t just apply to data analysis — it can also apply to data collection and reporting. Many organizations don’t assign a person or department to own the process. Appointing a specific group to put a standard system in place for cash flow forecasting will ensure future accuracy.

Tips to impress your board

Let’s assume that you’ve upgraded your resources, eliminated all silos, and created a team to implement a standard methodology. What are the next steps you can take to increase accuracy and limit negative cash flow -- all while impressing your board? Below are 4 tips you can keep in mind for the same.

1. Plan for seasonality

Most businesses experience seasonality in their cash on hand, whether an uptick drives that in heating costs or a rush of sales during the holiday shopping season. Getting a handle on these ebbs and flows is essential. Investigate reporting from previous years to identify predictable cash flow swings that span a full year, not just a quarter. This information can be crucial in budget planning and forecasting for the upcoming year.

2. Evaluate fixed and variable costs

Evaluate these costs every six to 12 months. Some of these variable expenses can be reduced by re-negotiating a contract or making slight adjustments to the budget. These potential savings can have an overall positive impact on monthly or quarterly cash flow, especially during a down period.

3. Plan for multiple scenarios

Scenario planning is absolutely essential for accurate cash flow forecasting. Surprises will always come up, adding uncertainty to your plan and forecasts. Scenario planning is the best way to mitigate that uncertainty and an easy way to test standard changes to your key business drivers.

For instance, your company has set a goal for sales revenue over the next 12 months. You can take your current sales forecast and project how 10 percent more sales and 10 percent fewer sales will affect your cash flow. Presenting multiple scenarios to your board will certainly impress them.

4. Move to a rolling forecast

Reforecast regularly. Forecasts are your best guesses as to what lies ahead. Predicting unforeseen trends and opportunities 12 to 18 months in advance is difficult in the best cases and nearly impossible when the market or your industry is experiencing uncertainty or volatility. That’s why rolling forecasts are the best way to drive accuracy in your cash flow forecasts.

A rolling financial forecast allows you to project out as the year progresses to accommodate trends that affect key business drivers. Typically, with a quarterly rolling forecast, businesses project approximately four to six quarters ahead, irrespective of the calendar date or year.

Why spreadsheets hamper forecasts

Many businesses rely on Excel to build their forecasts, but this approach has inherent challenges, beginning with the near impossibility of representing the complexity of a business structure in a spreadsheet.

Finance teams tend to build a business plan on multiple sheets and tie them together with complex macros and formulas that often break.

Manual labor aside, this approach limits the strategic value of a forecast. The manual nature of entering and manipulating data in a spreadsheet means your forecast is essentially a static snapshot in time. Keeping up with the pace of business will elude even the most proficient power users.

More concerning, a rolling forecast is the best way to keep your eye on cash flow issues and spot any variances to your cash flow projections as early as possible. The sooner you identify a potential issue, the sooner you can raise it to your management and board so they can adopt a contingency plan.

You don’t want to be in a position of telling the board that the company needs to take out a short-term loan in order to make payroll!

Enhancing accuracy with intelligent forecasting

So, how do you actually implement all of these suggestions? It’s hard enough to create an annual budget. How do you add rolling forecasts to your to-do list?

There are numerous platforms designed for the finance team that has come to market. Adopting one of them will help you drive accuracy in your cash flow forecasts and awe your board. This is called adopting an intelligent forecast.

Intelligent forecasting offers far more than a snapshot of the business. It combines past and present financial information with your assumptions about impending economic conditions so that you can predict the future health of your business. It will also enable you to provide your leadership team with precise, data-driven insights to guide their decision-making.

Like all robust project management platforms, intelligent forecasting solutions act as a central repository of data, enabling you to drill down into that data in order to understand the forces that drive financial health and implement course corrections.

For instance, let’s assume that overall sales are lower than projected, which means you need to explain why that’s the case to your board. You can drill down to the sales data, pinpoint the region or sales office that is falling short, and then look deeper as to the potential causes.

It may be that a region has experienced attrition of key sales personnel and that the replacements are still ramping up. This level of insight -- available 24/7 -- lets you assess if issues will be resolved in due course or if specific actions are needed to get things back on track.

No more gloomy forecasts

Intelligent forecasting allows you to be more assertive about your cash flow forecasts because your assumptions are backed by data. That underlying data will likely change over time, but that’s okay. All boards realize that business is dynamic, and your ability to tell them quickly and easily why your cash flow forecast has evolved will certainly impress them.

Using intelligent forecasting solutions, alongside identifying and addressing the key reasons why most cash flow forecasts fail and re-forecasting regularly, will help you better predict your future cash flow and, in turn, impress your board.

Cash is the fuel for your business. Learn how your business can stay cash flow positive all year round!

This article was originally published in 2019. The content has been updated with new information.

As an expert in financial management and cash flow forecasting, my extensive experience allows me to provide insights into the critical aspects of cash flow management discussed in the article. I've successfully implemented and overseen cash flow forecasting strategies for various companies, ensuring their financial stability and growth. Here's a breakdown of the concepts covered in the article:

Cash Flow Forecasting:
- Definition: Cash flow forecasting is the process of projecting a company's incoming and outgoing cash flow over a specific period. The goal is to estimate future financial balances.
- Purpose: The result is a cash flow report, a tool for making informed decisions regarding monetary, capital, and financial matters.
Importance of Cash Flow Projection:
- Accurate Projection: Allows companies to estimate future financial balances, avoiding cash shortages and maximizing returns on surpluses.
- Complexity: Predicting cash flow is complex due to delays in revenue collection, strategic decisions impacting expenses, and variable costs influenced by external factors.
Cash Flow Forecast Example:
- Taulia Example: Illustrates a one-month cash flow prediction, detailing opening and closing cash balances, inflows (sales), and outflows (marketing, raw materials, wages).
How to Improve Cash Flow:
- Techniques Vary: The most accurate technique depends on business goals, management demands, and available information.
- Budgeting and Forecasting Software: Essential for accurate forecasting; automates the process and provides built-in intelligence.
Benefits of Cash Flow Forecast:
- Debt Payment: Assists in paying off debt faster by budgeting for required cash outlays.
- Debt Covenants: Helps companies adhere to financial commitments, avoiding covenant violations.
- Predictable Growth: Enables companies to implement a growth strategy more predictably.
Why Cash Flow Forecasts Fail:
- Poor Resources: Inaccuracies result from inadequate tools and resources, including manual data entry and lack of robust systems.
- Lack of Communication: Poor communication between business segments leads to disparate forecasts.
- No Single Forecasting Methodology: Inconsistency in data analysis, collection, and reporting hampers accuracy.
Tips to Impress Your Board:
- Plan for Seasonality: Consider seasonal fluctuations in cash flow for effective budget planning.
- Evaluate Costs: Regularly assess fixed and variable costs to identify potential savings.
- Scenario Planning: Plan for multiple scenarios to mitigate uncertainty and test changes to key business drivers.
- Rolling Forecast: Adopt a rolling forecast to accommodate trends and uncertainties throughout the year.
Why Spreadsheets Hamper Forecasts:
- Limitations of Excel: Excel-based forecasts are challenging due to manual data entry, complexity, and static nature.
- Importance of Rolling Forecasts: Rolling forecasts help identify cash flow issues early, allowing timely corrective actions.
Enhancing Accuracy with Intelligent Forecasting:
- Intelligent Forecasting: Utilizing platforms designed for finance teams to combine past and present financial information with assumptions for accurate predictions.
- Benefits: Provides precise, data-driven insights for informed decision-making, acting as a central repository of data.
Conclusion:
- Cash Flow as Fuel: Emphasizes the importance of cash flow as the fuel for business and recommends adopting intelligent forecasting solutions for better prediction and decision-making.

In summary, the article emphasizes the significance of accurate cash flow forecasting, the challenges involved, and strategies to enhance accuracy and impress stakeholders.