Why Is a Cash Flow Forecast Important?

Financial modeling is based on concrete figures – so why is a cash flow forecast important for businesses of all sizes? By estimating future cash flows, you’ll be better placed to create accurate budgets with all associated revenue and expenses. Here’s a closer look at the role cash flow forecasting plays in successful financial planning. We’ll also give you a few tips to help you get started.

What is a cash flow forecast?

A cash flow statement shows the movement of money as it flows in and out of your business accounts. When a business has more cash flowing out than in, this shows a negative cash flow. When a business takes in more cash than it spends, this shows a positive cash flow.

A cash flow forecast assesses upcoming cash flows, including income and expenses, to predict a business’s future cash flow position. If your cash flow forecast shows a negative position in the future, you can act now to increase inflows. 

Cash flow forecasting is often used alongside income statement and balance sheet analysis in financial modeling. This is called a three-statement model, used to look at your business’s wider expected performance for the long term.

How do you forecast cash flow?

Forecasting cash flow begins with ensuring that your cash flow statement is updated on a regular basis for ready analysis. You’ll need to assess three areas:

• Cash balance

• All cash inflows including receivables and sales

• All cash outflows including operating expenses

This current and historic data is used to make assumptions about future estimates including income and expenses. You’ll also need to pull additional data together including industry standards, sales growth trends, past performance, and other areas.

With this in hand, you can then estimate your future sales income as well as other cash inflows like tax refunds or government grants. The next step is to estimate future expenses including supplier payments, investments, and assets.

Cash flow forecasting software makes short work of this process, analyzing data to create more accurate projections.

Why is a cash flow forecast important to a business?

As you can see, a fair bit of work goes into cash flow forecasting – so why is a cash flow forecast important to a business? Cash flow forecasts:

• Help you make strategic business decisions

• Help you create a more useful budget

• Predict times of negative cash flow

• Are used by investors and lenders with decision-making

You can adjust your cash flow forecasts according to various market conditions as well. For example, you can determine the toll a recession would take on your cash flow and start preparing accordingly. By looking at ways to best manage your cash flow in the short and medium term, you’ll then be best prepared to tackle long-term growth. You might be thinking about developing a new product, for example. By looking at a cash flow forecast, you’ll be able to see when you might have existing funds for this type of investment. It can also be presented to investors to show how well your business manages its working capital.

Why should you compare actuals to cash flow forecasts?

A final step in cash flow forecasting is comparing your predicted budget to actual spend. Was the budget realistic? Did you miss any major costs? Comparing actuals to forecasts is quite useful for future modeling purposes. You can see where your predictions went wrong. Analyzing your forecasted budget highlights areas where your business spent more or less money than intended, for greater efficiency going forward. It also helps strengthen relationships with customers and suppliers with a better understanding of expenses.

Finally, don’t forget to review your forecast sheet periodically to see if your predictions are on track. If sales figures are nowhere near what you expected, it shows a lack of accuracy in your assumptions. This requires tweaking in the short term for better long-term results. Fortunately, today’s accounting software makes financial modeling easier than ever. GoCardless partners with over 300 integrations, including top software like Xero to keep your finances up to date.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.