Cash flow forecasting is the process of estimating the flow of cash in and out of a business over a specific period of time. It is an essential element of financial management, particularly for start-ups and small enterprises, as cash flow is a central part of managing the business and the financing of ongoing operations. A cash flow forecast helps companies predict future cash balances and assists with forward liquidity planning. It is typically based on anticipated payments and receivables and can be used to model a company or entitys future financial liquidity over a specific timeframe.
A cash flow forecast can help businesses identify potential cash flow issues that might result in a covenant breach, which could require them to pay the balance of their loan in full, on-demand. It can also enable businesses to grow more predictably by highlighting when and where funding needs arise and allowing them to take advantage of times when excess liquidity is available. A more comprehensive cash flow forecast will show where the cash is right now, if there will be enough cash in the future, where it will be, and what will happen along the way.
Creating a cash flow forecast can help businesses to better understand expected cash movements over a selected period of time, allowing them 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. A cash flow forecast is essentially a log of expected inflows and outflows of money into a business over a set timeframe. It is a living, breathing business tool that should be reviewed and updated on a monthly basis.
