A cash flow forecast is an imperative financial tool for every business. It will identify whether you have enough cash to run or expand the business. Likewise, without an accurate cash flow forecast to anticipate the company’s needs, a thorough strategic plan will become pointless. Furthermore, contractions in business are a harsh reality. By establishing and maintaining a solidified cash flow forecast, you significantly mitigate the adverse effects of contractions.

We have created this article to give you a brief overview of some of the cash flow forecasting techniques you and your subsequent business can use in the new year.

Why an Accurate Cash Flow Forecast Matters for your business

We have mentioned prior why coupling well-structured financial budgeting and cash flow forecasting is essential to business finance. However, on its own, cash flow forecasting is critical as a stand-alone tool. Ultimately, cash flow forecasting enables a business owner to differentiate between two valuable financial metrics – profit and cash flow. Without this forecast, it becomes more challenging to make informed business decisions and plan for change. Plotting out expected cash movements and keeping track of this will allow your business to experience tremendous growth. Without significant cash flow setbacks. Finally, the more data, the better. Identifying inflows, outflows and shortfalls will make your business more adaptable to change and more accurate when forecasting further and further into the future.

Understanding Direct vs Indirect Forecasting

Simply put, short-term forecasting is another term for direct forecasting. However, this aims to be more specific with cash movements and positions, typically day, week or month movements. The longer-term forecasting, indirect, often provide vague results but are fantastic at outlining long-term goals. Many companies combine theories of both forecasting techniques and essentially recreate their budget. As a general rule, the further you forecast out, the less reliable the information inherently gets. It is important to note the three methods of deriving indirect cash forecasts:
1) Adjusted Net Income (ANI): Derived from operating income, EBIT(A) or changes on the balance sheet.

2) Proforma Balance Sheet (PBS): Calculated from projecting the balance sheet cash account to a certain point in time.

3) Accrual Reversal Method (ARM): A hybrid technique using ANI and statistical analysis to reverse accruals and create specific calculations for different time periods.

In summary, these cash flow forecasting techniques are all valid in certain scenarios. It is best to consult a financial advisor to discern which process is best for you.

Components for a Medium-term Forecast

The components of the medium-term forecast are largely comprised of formulas, rather than the specific data inputs used for a short-term forecast. This is where assumptions have to be primarily made as well. These can be made on past performance, industry publications, competitor knowledge and even suppliers. Some include:

  • Sales growth estimates
  • Impact of seasonality
  • Price increases

Understanding these and how activities generally time-lag when concerning cash flow help build the basis for your medium-term cash flow forecasting. Then you have to prepare anticipated sales income, which is often hard to predict. As a general, for “Cash paid for the cost of goods sold items“, you can estimate this as a percentage of sales, with a time lag based on the average supplier payment terms. Finally, ensure you have prepared established cash inflows and estimated expenses. Once this is completed, a medium-term forecast is simply adding all the information together, alongside creating “what-if” scenarios to see if your business can handle extra cash outflows and other risks.

Example of Assumptions / Time-lag in a Cash Flow Forecast
Source: Quickbooks Payroll

Use the CASHFLOWNAV App

Ultimately, cash enables a business to settle its debts, reinvest in the company, and create security around future finances. Without adequate management of your cash flow forecast, this can have a significant influence on the health of your business and if managed poorly, can turn into a slippery slope resulting in rapid failure. 

If you are a business owner or accountant looking for a simple way to analyse and manage your cash flow forecast then look no further. Introducing the CASHFLOWNAV App – The simple way to manage your business cash flow.

BUSINESSNAV’s CASHFLOWNAV App is an accounting software built for accountants and business owners. The CASHFLOWNAV App delivers the most important financial figures for your business, saving you time otherwise spent navigating lengthy and confusing spreadsheets.

But how do we determine what financial figures are important for your business? We use the CASHFLOWNAV Factor.

The CASHFLOWNAV Factor and Forecasting

The CASHFLOWNAV Factor gives you a true understanding of your business’s cash flow by showing you your operating profit and using advanced equations and an understanding of your balance sheet to give you a clear indication of whether your cash flow forecast is headed in the right direction.

Ultimately, a negative cash flow is like a disease that can kill a business if not treated. The CASHFLOWNAV Factor can not only find that disease but also help you treat it. This is one of the very basic yet effective formulations of cash flow forecasting techniques, utilising BUSINESSNAV’s CASHFLOWNAV Factor within an easy to use application for any mobile. And better yet, it’s free!

Download the CASHFLOWNAV app via the App Store here or Google Play here, or for more information click the button below: