What are the main components of a cash flow forecast?

A cash flow forecast is like a money plan for a business. It looks at different parts, such as the cash coming in (cash inflow) from sales and services, the money needed for everyday operations like salaries and rent (cash outflow), and the cash used for long term assets purchases like buying property and capital expenditure (investing activities). It also checks how the business gets money, whether from loans or selling parts of the business (financing activities). The forecast shows the overall picture of money, starting with how much cash the business has and estimating how much it might have in the future. It helps make money decisions and understand how the business is doing financially.

A cash flow forecast is an essential tool for financial planning, providing a projection of cash inflows and outflows over a certain period. The main components include the opening balance, which is the amount of cash available at the beginning of the period. This is followed by expected cash receipts from various sources such as sales or loans, and cash payments for expenses. The forecast will then show the net movement of cash and conclude with the closing balance, indicating the expected cash position at the end of the period.

In my experience as a CFO, the opening balance is a critical starting point for cash flow forecasting. It's not just a number, but a reflection of your business's financial health at a given moment. Regularly updating it ensures accuracy in your forecasts, enabling better growth planning and risk mitigation. Remember, a negative opening balance may indicate a need for strategies to increase net margins or reduce cash outflows.

This balance serves as the starting point for cash flow during a specified period and can significantly influence financial decision-making. For example, let's consider a furniture manufacturing company that begins its month with a positive opening balance. This indicates they have more cash available to cover initial expenses such as raw materials or salaries. However, if the opening balance is negative, the company may face financial challenges from the outset, which could require more careful resource management or the pursuit of additional sources of financing.

You must get this right otherwise everything else is wrong! It sounds simple and obvious, and it is! The opening balance should be the closing balance from midnight on the day before the forecast starts.

One the key factors for an accurate cashflow forecast is studying the business seasonality and customers behavior, we should take into consideration the sales mix and the payment terms for each of them, the actual receivables days reflects the forecasted collection based on sales more accurately than the payment terms as there's always a delay for payment processing at the clients and issuing banks side.

Cash inflows shows the amount of money coming into the business from sales, loans, grants etc. Cash inflows may vary from month to month depending on behaviour of customers or maybe certain events that happen at specific times of the year leading to more sales. It is important to establish such trends to enable you do cash flow forecasting for the business

While I agree with this, I believe it’s beneficial to break out operating, capital and financing aspects of cash inflows and outflows

The main components of a cash flow forecast, particularly concerning cash inflows, include the opening cash balance, which provides the starting point for the forecast. Cash inflows then detail the expected money to be received during the forecast period, such as sales revenue, loan proceeds, and investment income. These projections are informed by historical data, market trends, and sales patterns to estimate the timing and amount of cash entering the business. Accurate cash inflow forecasting is crucial for maintaining liquidity and ensuring that a business can meet its financial obligations as they arise.

Cash inflows from customers are the most difficult to estimate as they are not under your control. Look for payment patterns and those who pay on time and on certain dates e.g. last Friday of the month, second Wednesday. This helps forecasting receipts. Also remember the 80/20 pareto principle - 80% of your receipts will probably come from 20% of your customers so focus on these ones.

The main components of a cash flow forecast related to cash outflows typically include operating expenses, loan repayments, supplier payments, and taxes. These are estimated based on historical data and future financial commitments. Additionally, cash outflows may encompass investments and any other expenses that the business expects to incur during the forecast period. Accurately projecting these outflows is crucial for maintaining a healthy cash balance and ensuring the business can meet its financial obligations.

In cash flow forecasting, it's crucial to remember that cash outflows are not just about expenses but also about timing. As a fractional CFO, I often see businesses facing liquidity issues due to poor timing of payments, even if they are profitable on paper. Therefore, it's essential to incorporate a buffer and anticipate potential changes in your business, such as hiring new staff or making capital investments. If you were thinking of making that hire or buying that equipment in July, it might be beneficial to start increasing those categories in May or June to see the impacts on cash flow before executing the decision. This proactive approach can help prevent liquidity crises and ensure the business runs smoothly.

Let's consider, for example, a processed food company operating in a highly competitive environment. Cash outflows, such as raw material costs, employee salaries, facility rent, utilities, and other operating expenses, are crucial to maintaining production and business operations. By accurately estimating and planning these cash outflows, the company can avoid liquidity issues and ensure the continuity of its operations. For instance, if the company anticipates an increase in ingredient costs due to seasonal changes or fluctuations in market prices, it can anticipate these expenses and adjust its budget accordingly.

I’m glad you finally used the word liquidity. Liquidity is defined as cash plus available short term borrowings under a revolving credit agreement or a commercial paper program. In my experience, liquidity is the most important metric to have a handle on. Cash forecasting and cash flow statement projections are not built the same way. Bottom up v. top down. Cash flow statement projections will not tell you where a liquidity squeeze may be coming where as a cash forecast (bottom up) will show it quickly

A cash flow forecast is like the financial weather report for your business, predicting whether you'll be basking in the sunshine of surplus or reaching for an umbrella to shield from a cash drought! The main components are the opening balance, which is your financial starting line, and the expected cash in, like sales or loans, which are the sunny days in your forecast. Then there's the expected cash out, the storm clouds on the horizon, which include expenses and payments. The net cash flow is the breeze that shows if your cash reserves are flying high or if you need to brace for a financial chill.

Here's the exciting part, the net cash flow for that period! Did our bank account go up or down this month? When forecasted accurately, this provides us very clear instruction on where we should focus. Cash positive for the next six months, then your extra spending isn't going to break the bank. Go all-in on interviewing new candidates, implementing that software, or getting quotes on that new piece of equipment. Cash negative in months 3 and beyond? Hit the brakes! Did plan on investing too much? Did one of our vendors just issue a price increase? Do we project that revenue will slow next quarter? Stay the course and focus on the factor that is driving the negative cash flows.

A cash flow forecast is likely imperative for fund raising (investment or loan). It provides a view of how money moves in and out of the business over time acting as a crucial tool to assess its financial health and sustainability (liquidity). An investor will use a cash flow forecast to gather insights into a company's operations, its plans to meet financial obligations, and the odds to generate a ROI. It can be used to inspire lender or investor confidence in a company's ability to predict its financial situation. Regardless of the need to raise funds, learning to forecast cash flow will help you identify potential cash shortages or surpluses, so that you can plan accordingly and make adjustments to meet your financial goals.

Explaining the cash forecast is the easy part. Getting the accurate data from the business on a regular and timely cadence is the challenge. Let’s not forget variance analysis to hold the business accountable for their submissions.

A cash flow forecast is a vital tool for financial planning, providing a projection of cash inflows and outflows over a certain period. The main components include the opening balance, expected receipts, and payments, which are broken down by classification, leading to the net movement of cash. This culminates in the closing balance, which reflects the company's cash position at the end of the period. Understanding these elements is crucial for maintaining liquidity and ensuring the financial health of a business.

I believe cash flow reports / forecasts are best when it includes multiple years of historical performance along with at least 3 years of forecast to ensure that future trends are achievable and if there are any identified stress points in near future

Il y a deux méthodes de prévisions des flux de trésorerie : - la méthode directe utilisée par les trésoriers qui consiste à lister tous les encaissements et les décaissements par nature. Elle requière un excellent mapping des natures de dépenses (marchandises, loyers, frais généraux, capex,…) et des encaissements dans les systèmes d’informations pour disposer de données historiques et prévisionnelles fiables. - la méthode indirecte utilisée par les contr?leurs de gestion qui s’appuie sur les les comptes de résultats et bilans prévisionnels. Le croisement des deux méthodes permet de s’assurer de la fiabilité des prévisions.

A basic point: Assuming that the cash flow forecast is part of a business plan, then make sure that the cash flow forecast reconciles with the other pro-forms financial statements. Its amazing how often I see small business startup plans that do not.

I've written a book on this: Mastering Cash Flow for Business Owners, available on Amazon, or you can download a free PDF version at masteringcashflowbook.com