Home / Glossary / What is cash flow forecasting?

What is cash flow forecasting?

Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term.

A medium-term cash flow forecast may cover between one month and one year ahead, while a long-term forecast will be used to look at sales and purchases further into the future – between one year and five years ahead or even longer, depending on the nature of the business. The longer the time horizon of a cash flow forecast, the less accurate it is expected to be.

The result of cash flow forecasting is a cash flow forecast document which shows your projected cash position based on income and expenses for the selected timeframe. This is an important tool when it comes to making decisions about activities such as funding, capital expenditure and investments.

Cash flow forecast example

Cash forecasting can be carried out for a range of time horizons, but the following example shows a simple one-month cash flow forecast for a business in the month of January, with net cash flow calculated 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

What is the purpose of a cash flow forecast?

Predicting future cash flow is a top priority for any company, as it helps you optimize your cash position, prepare for future cash flow problems, and make better-informed decisions. At the most basic level, a cash flow forecast can estimate if you will have a positive cash flow (meaning more cash is coming into the business than going out) or a negative cash flow (meaning more cash is going out than coming in) at a given point in time.

Armed with an accurate cash flow forecast statement, you can minimize the cash buffer needed for unforeseen expenses and make better use of your company’s excess cash. You can also plan ahead for any expected cash deficits and manage FX risk more effectively. What’s more, an accurate and timely projection can help boost the forecaster’s profile and reputation with key stakeholders within the business.

Cash flow forecast challenges

However, companies often find it difficult to forecast their cash flows accurately – particularly if the business operates across a variety of countries and currencies. In order to build an accurate cash flow forecast, the forecaster will need to obtain accurate, up-to-date information from a variety of different sources around the organization. This can result in a number of challenges, including:

Time. Forecasting can be an arduous and time-consuming process, particularly if the forecast is based on spreadsheets and involves manual data collection.
Errors. Manual data collection processes may also run the risk of data inputting errors and inconsistencies.
Lack of co-operation from stakeholders. Internal stakeholders may fail to provide information on time or in the required format – particularly if they do not understand why the forecast is important.
Lack of forecasting tools. Once the required information has been sourced, the forecaster will need to have suitable tools in place to turn the data into a forecast. But without sophisticated tools available, this can be an unwieldy undertaking.

In order to overcome these challenges, companies should consider how they can improve the data collection process and make use of technology to maximize the accuracy and timeliness of the resulting forecast.

In order to streamline the forecasting process, the forecaster needs to ensure that the people who need to provide information understand the importance of the forecast and the level of detail required from them. Another important consideration is the need for executive sponsorship. If senior management demonstrates clear commitment to the forecasting process, stakeholders are more likely to engage with the process and the forecast is more likely to provide value.

Also important is understanding that forecasting doesn’t end once the forecast itself is up and running. The accuracy of a cash flow prediction should also be monitored on an ongoing basis by comparing forecast and actual cash flows. While few forecasts will be 100% accurate, monitoring the level of accuracy achieved by the forecast gives the company the ability to pinpoint any areas for improvement. A feedback loop should also be established so that appropriate action can be taken to address any variances.

The importance of cash flow forecasting

Focusing on overcoming any challenges you face in putting together a cash flow forecast is time well spent, because the importance of cash flow forecasting in financial planning can’t be overstated. While business owners, C-suite executives, or senior management will generally understand the business’ financials implicitly and may have expectations of profit and loss, they can’t predict the future.

Without using a formal data-led process to forecast future cash flow, it’s almost impossible to predict changes to sales or costs and estimate how much cash your company will have at any given time. That makes it incredibly difficult to make informed business decisions about current or future spend, understand how to plan for change, or confidently pursue business growth.

With the insights that are delivered by a cash flow forecast statement, even with the understanding that they’re not exact, it’s possible to make more intelligent working capital decisions that fuel future growth or protect the business against potential instability.

Cash flow forecasting solutions

Cash flow forecasting software can help companies forecast their future cash flows with greater accuracy.

Sophisticated cash forecasting solutions can use both live and historical data on the company’s payables and receivables, alongside technologies such as machine learning, to provide fast and accurate near-real-time forecasts. These may take into account not only current purchase orders, payables and receivables, but also behavioral patterns such as invoice approval times.

Visualization tools can help companies understand the forecast quickly and easily, thereby facilitating corporate decision-making. In addition, cash forecasting tools which integrate seamlessly with the company’s ERP instances around the world can reduce the challenges associated with gathering information from disparate sources.

FAQs

Why is a cash flow forecast important?

Creating a cash flow forecast can help businesses to better understand expected cash movements over a selected period of time. This projection of future finances, in turn, allows businesses to make more informed decisions, avoid finding themselves short on cash when they need it, and know how much capital they have to pour into fueling growth.

How do you do a cash flow forecast?

At its most basic level, a cash flow forecast is essentially a log of expected inflows and outflows of money into your business over a set timeframe. Therefore, creating a cash flow forecast is theoretically as simple as filling out a spreadsheet with all projected income and expenses over that period. However, at enterprise level where there can be thousands of different sources of income and expenses, cash flow forecasts can become much less simple to put together. In these circumstances, it’s often easier to use dedicated cash flow forecasting software.

What is included in a cash flow forecast?

Cash flow forecasts should contain four main categories of information: expected income, projected dates for when you’ll receive that income, expected costs, and projected dates for when those costs will be incurred. However, at a more granular level, a cash flow forecast will include income from sources like sales, interest, and sale of assets and expenses from sources like materials, wages, and marketing.

How can you improve your cash flow forecast?

Improving the value that a cash flow forecast delivers is best achieved by improving the accuracy with which you forecast future income and expenses. That can be done in a range of ways, but some of the most common include refining your approach to sales forecasting and ensuring you keep perfectly accurate logs of expenses. Most importantly, though, is to compare your previous cash flow forecasts with the actual income and expense data from the same period. This can help you to understand where your forecasting approach works well and where it falls short, leading to gradual improvements to the overall process.

What is ESG? ESG stands for environmental, social and governance. Together, these three principles form a framework that’s used to measure how sustainably, ethically, and responsibly an organization is acting. ESG is most often used to describe the efforts companies take to mitigate the potential negative outcomes of their operations. It also refers to a…

What is supply chain management? Supply chain management (SCM) describes the process businesses use to manage the flow of goods, data, and payments throughout a supply chain. Effective supply chain management is instrumental in ensuring every element of the supply chain works towards achieving broader business objectives, whether that’s cost-efficiency, resilience, quick order fulfillment, or…

What is supply chain optimization? Supply chain optimization is the process of refining the structure and operation of a supply chain. It aims to make the best use of resources and technology to extract greater efficiency and performance from the supply chain network. Well-optimized supply chains enable businesses to meet their broader objectives, whether that’s…

What is accounts receivable? Accounts receivable (AR) is the term used to describe money owed to a business by its customers for purchases made on credit. It’s listed as a current asset on the balance sheet, representing the total value of outstanding invoices for products or services sold but not yet paid for. Total accounts…

What is cash flow management? Cash flow management is the process of optimizing the flow of money in and out of a business to achieve a specific operational aim. Effective cash flow management enables businesses to use their working capital better and fuel growth or build resilience. It involves using several levers, including the approach…

What is strategic sourcing? Strategic sourcing is the term used to describe a strategic approach to the sourcing process. It involves the same fundamental steps – research, analysis, negotiation, contracting, and onboarding of new suppliers to fulfill demand for goods or services – but is oriented to contribute to broader business objectives. It also often…

What is automated spend analysis? Automated spend analysis is an automatic digital process that captures, consolidates, and interprets spend data across an organization. It’s used to provide insights into spend efficiency and effectiveness, informing sourcing and purchasing decisions. It’s typically facilitated through dedicated automated spend analysis software, usually integrated with a wider enterprise resource planning…

What is the new FASB accounting treatment for supply chain finance? In September 2022, the Financial Accounting Standards Board (FASB) — the governing body for accounting standards in the United States — updated its standards to include a requirement for SCF disclosure on company financial statements. For most organizations, disclosure of an existing SCF program…

What is spend visibility? Spend visibility refers to how well a company can understand and track how, where, and why capital is used in their business operations. Spend visibility increases when finance teams can more accurately see where company money is being spent. Low spend visibility is defined by difficulties tracking spend comprehensively or accurately….

What is 2/10 net 30? 2/10 net 30 is a trade credit often offered by suppliers to buyers. It represents an agreement that the buyer will receive a 2% discount on the net invoice amount if they pay within 10 days. Otherwise, the full invoice amount is due within 30 days. It’s one of the…

What is working capital ratio? Working capital ratio is a measurement that shows a business’s current assets as a proportion of its liabilities. It’s a metric that provides an overview of financial health and liquidity, indicating whether current liabilities can be paid by existing assets. In the case of working capital ratio, assets are typically…

What is a virtual card? A virtual card is a payment method that is virtual rather than physical. It functions similarly to a traditional credit card but takes the form of a single-use 16-digit number and three-digit CVV code generated online, instead of a plastic or metal card that is received through the post. Virtual…

What is e-procurement? E-procurement refers to the set of digital processes that dictate B2B buyer-supplier relationships in the supply chain. Utilizing technology, e-procurement aims to centralize the workflows involved in purchasing goods or services and bring about efficiency improvements. It’s essentially the digitization of the standard procurement process. E-procurement, short for electronic procurement, replaces traditional…

What is source-to-pay? Source-to-pay (or S2P) is the process that outlines how organizations fulfill their sourcing and procurement needs. It begins with the identification of demand for a product or service, encompasses steps including supplier selection, contract management, and requisition, and ends with a payment being made. It can be split into two composite sections:…

What is supplier relationship management? Supplier relationship management is the set of processes that organizations use to build, manage, and maintain relationships with their suppliers, or vendors. A supplier relationship management strategy is essential to ensure that relationships are built productively, with a view to increasing the overall effectiveness and resilience of the supply chain….

What is supplier information management? Supplier information management (SIM) refers to the set of processes or the system that organizations use to collect, store, access, and update important data about their suppliers. From contact details to contractual documentation, the data involved in supplier information management is essential in the broader process of vendor management. A…

What is AP automation? AP automation, short for accounts payable automation, is the use of software to automate part or all of the accounts payable process. It aims to create efficiency in the accounts payable workflow by digitizing how vendor invoices are received, processed, and stored. In removing manual processes and the need for paper-based…

What is accounts payable? Accounts payable (AP) represents the amount that a company owes to its creditors and suppliers (also referred to as a current liability account). Accounts payable is recorded on the balance sheet under current liabilities. When a business purchases goods or services from a supplier on credit, payment isn’t made straight away,…

What is accounts receivable (AR) financing? Accounts receivable or AR financing is a type of financing arrangement which is based on a company receiving financing capital in return for a chosen portion of its accounts receivable. An AR financing arrangement can be structured in several ways, including as an asset sale or a loan. Essentially,…

What is the cash conversion cycle (CCC)? The cash conversion cycle (CCC) – also known as the cash cycle – is a metric expressing how many days it takes a company to convert the cash it spends on inventory back into cash by selling its product. The shorter a company’s CCC, the less time it…

What is cash flow forecasting? Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or…

What is Days Inventory Outstanding? (DIO) Days inventory outstanding (DIO) is a working capital management ratio that measures the average number of days that a company holds inventory for before turning it into sales. The lower the figure, the shorter the period that cash is tied up in inventory and the lower the risk that…

What is Days Payable Outstanding? (DPO) Days payable outstanding (DPO) is a useful working capital ratio used in finance departments that measures how many days, on average, it takes a company to pay its suppliers. As such, DPO is an important consideration when it comes to managing a company’s accounts payable – in other words,…

What is Days Sales Outstanding? (DSO) Days sales outstanding (DSO) is a working capital ratio which measures the number of days that a company takes, on average, to collect its accounts receivable. The shorter the DSO, the faster the company collects payment from its customers – and the sooner it is able to make use…

What is dynamic discounting? Dynamic discounting is a solution that provides suppliers with the option of receiving early payment in exchange for a discount on their invoice. As a result, suppliers can typically access lower cost funding than they might otherwise receive, while harnessing working capital in order to invest in growth and innovation. Buyers, meanwhile,…

What is an early payment discount? An early payment discount is a form of trade finance, allowing buyers to pay a discounted amount to suppliers in exchange for settling invoices before their maturity date. Also known as a prompt payment discount or early settlement discount, it’s typically calculated as a percentage of the goods and…

What is inventory management? Inventory management is a systematic approach to sourcing, storing, and selling inventory. It provides a company with the ability to oversee the ordering and storing of business supplies or products and helps to understand both stock levels and the location of stock in a warehouse. An effective inventory management system manages…

What is invoice processing? Invoice processing is a business function that involves managing incoming invoices from initial receipt through to payment. It’s carried out by the accounts payable department and is a critical component of the procure-to-pay process as the final step of any procurement activity. The invoice processing cycle is made up of several composite…

What is inventory cycle time? Inventory cycle time is the amount of time it takes to produce and deliver an order from a customer, usually measured in days. It essentially measures the speed at which a company can complete the manufacturing or assembly process from start to end, turning raw materials or components into a…

What is procure-to-pay? (P2P) Procure-to-pay is a term that encompasses the processes which take place when a company purchases, receives, and pays for goods and services. The activities that make up the procure-to-pay process range from identifying the initial need for procurement of goods or services, to the final steps of approving invoices and paying…

What is the procurement life cycle? Procurement managers are responsible for implementing the rules and procedures that ensure tasks and processes are performed successfully throughout the procurement process. But how a procurement process looks is entirely dependent on the size and type of business. There is no one-size-fits-all approach, so you should tailor the procurement…

What is receivables finance? Receivables finance, or receivables financing, is a trade finance method businesses can use to receive funding matching the amounts owed to it by its customers in outstanding invoices. These amounts are known as trade receivables or accounts receivable. By financing its receivables, a business can receive payments earlier, meaning it can…

What is reverse factoring? Reverse factoring is a type of supplier finance solution that companies can use to offer early payments to their suppliers based on approved invoices. Suppliers participating in a reverse factoring program can request early payment on invoices from the bank or other finance provider, with the buyer sending payment to the…

What is trade finance? Trade finance is the term used to describe the tools, techniques, and instruments that facilitate trade and protect both buyers and sellers from trade-related risks. The purpose of trade finance is to make it easier for businesses to transact with each other. It also helps to reduce the risks involved in…

What are trade receivables? Trade receivables are defined as the amount owed to a business by its customers following the sale of goods or services on credit. Also known as accounts receivable, trade receivables are classified as current assets on the balance sheet. Current assets are assets which are expected to be converted to cash…

What is strategic procurement? Strategic procurement, or procurement strategy, is a long-term, organization-wide process that aims to ensure necessary goods or services, of the right quality and the right price, are procured on time to meet demand. It brings procurement activities in-line with a company’s broader objectives, while also reducing supply chain risk. Strategic procurement…

What is supply chain finance? Supply chain finance, also known as supplier finance or reverse factoring, is a financing solution in which suppliers can receive early payment on their invoices. Supply chain finance reduces the risk of supply chain disruption and enables both buyers and suppliers to optimize their working capital. Unlike other receivables finance…

What is vendor management? Vendor management is a term that describes the processes organizations use to manage their suppliers, who are also known as vendors. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery. The vendors used by a company will vary considerably depending on…

What is working capital management? Working capital management is a business process that helps companies make effective use of their current assets and optimize cash flow. It’s oriented around ensuring short-term financial obligations and expenses can be met, while also contributing towards longer-term business objectives. The goal of working capital management is to maximize operational…