Cash Flow Forecasts Aid in Financial Planning and Identifying Potential Shortfalls
- What would you do to plan for your grad trip?
- You'd probably map out your route, estimate fuel costs, and budget for meals and accommodations.
- Without this plan, you might run out of gas in the middle of nowhere or overspend on a hotel, leaving you short on cash.
- A cash flow forecast is like this road trip plan, it helps businesses anticipate and manage their financial journey.
Definition
Cash Flow
The movement of money into and out of a business over a specific period. It includes both cash inflows (receipts) and cash outflows (payments).
What is a Cash Flow Forecast?
Definition
Cash Flow Forecast
A cash flow forecast is a financial projection that estimates the amount of money expected to flow in and out of a business over a specific period. It helps businesses predict their future cash position, ensuring they have enough liquidity to cover expenses and make informed financial decisions.
- It serves as a financial roadmap, highlighting when cash will enter and leave the business.
Key Components of a Cash Flow Forecast
- Opening Balance: The cash available at the start of the period.
- Cash Inflows: Money coming into the business, such as sales revenue, loans, or investments.
- Cash Outflows: Money leaving the business for expenses like rent, salaries, and inventory.
- Net Cash Flow: The difference between total inflows and outflows for the period.
- Closing Balance: The cash remaining at the end of the period, which becomes the opening balance for the next period.
Simplified Cash Flow Forecast For Jojo Ltd. for five months.
| $ (000) | Janunary | February | March | April | May |
|---|---|---|---|---|---|
| Opening balance | 500 | 800 | 950 | 1,230 | 1,510 |
| Inflows | |||||
| Cash Sales | 600 | 500 | 650 | 680 | 730 |
| Rent Received | 50 | 50 | 50 | 70 | 70 |
| Total Cash Inflows | 650 | 550 | 700 | 750 | 800 |
| Outflows | |||||
| Stock | 200 | 250 | 250 | 300 | 350 |
| Salaries | 100 | 100 | 100 | 100 | 100 |
| Others | 50 | 50 | 70 | 70 | 50 |
| Total Cash Outflows | 350 | 400 | 420 | 470 | 500 |
| Net Cash Flow | 300 | 150 | 280 | 280 | 300 |
| Closing Balance | 800 | 950 | 1,230 | 1,510 | 1,810 |
- A retail store might forecast a cash shortfall in January due to high inventory purchases for the holiday season.
- By identifying this in advance, the store can negotiate extended payment terms with suppliers.
- Don't confuse a cash flow forecast with a cash flow statement.
- Cash flow forecast = future looking (predicts expected cash inflows & outflows)
- Cash flow statement = past looking (records actual cash movements)
Benefits of Cash Flow Forecasts
1. Planning for Financial Stability
- A cash flow forecast acts as a roadmap, showing how much cash is coming in and going out.
- It helps businesses predict future cash needs and ensure they can cover operating costs.
A business can be profitable but still run out of cash if customers delay payments or expenses pile up unexpectedly.
2. Securing Loans and Investments
- Banks and investors use cash flow forecasts to assess whether a business is financially stable and capable of repaying debt.
- A strong forecast improves credibility and increases the chances of securing funding.
