Cash Flow Forecast

All businesses have a stream of money that travels into and out of their accounts. This is referred to as cash flow.

Businesses need cash to operate. Cash allows the business to fulfill its payroll obligations, purchase goods and supplies, and pay its bills and taxes.

In order to properly anticipate and plan for the fulfillment of these obligations, accountants and financial operations managers must project cash flow.

This is referred to as a cash flow forecast or a cash flow projection. The cash flow forecast is a planning tool that enables the business to look ahead and see how much money it will have in its accounts at the end of a reporting period, and how much of that will be available to pay bills and invest in future growth.

Cash flow is an indicator of a business’s liquid assets or liquidity. Liquidity refers to the amount of actual cash a business can generate.

Many businesses own things that have monetary value, such as real property, buildings, trademarks, machinery, or equipment.

These are long-term, or non-liquid, assets because they cannot be easily converted to cash in less than a year.

Cash flow is a “net quantity.” It not only puts a value on cash coming into the business, but it also accounts for money going out. In other words, the final measure of cash flow represents money coming in after money going out has been subtracted.

In this way, cash flow can be positive or negative depending on which side of the equation is greater. For example, if a business has more money coming in than going out, it will have a positive cash flow. If more money is going out than coming in, the business will have a negative cash flow.

Cash flow is more just the amount of actual dollars and cents that come into a cash register in the course of the day. In the modern business world, there are many variables that help calculate a business’s cash flow.

Cash flow is a reflection of all manner of financial activities that impact cash, such as accounts receivable (money owed to the business by its customers), accounts payable (money the business is obligated to pay out to vendors and other businesses), inventory, unearned revenue, and net income.

Cash flow forecast looks at all of these variables in arriving at its projections.

There are two methods for calculating the cash flow forecast.

1. The direct cash flow method, or income statement method, tracks the flow of cash that comes in and goes out of a company in a specific period, typically on a monthly accounting basis. It is more often used by smaller businesses.

2. The more common indirect cash flow method is calculated by adjusting net income by adding or subtracting differences resulting from non-cash transactions, including the sale of land, increases in accounts payable and accounts receivable, depreciation, stock transactions, financing, and other non-cash financial activity.

Cash flow forecasts can also be calculated for different periods of time.

• Short term forecasts look at a few weeks into the future and help manage the immediate cash needs of the business

• Medium term forecasts examine longer periods, such as 13 weeks, and are used for a quarterly perspective

• Long term forecasts project cash flow for a full year.

Cash flow forecasts can also be performed on mixed periods, using multiple time frames, such as weeks and days, to get a sampling of different perspectives.

The cash flow forecast includes a number of figures from the business’s accounting statements for the accounting periods under review:

• Opening balances

• Receipts broken down by all sources of cash

• Total receipts

• Payments or cash going out, for all categories of expenses

• Total payments

• Net cash flow, by individual cash flow items, and total for all

• Closing balances