Estimating the flow of cash into and out of your firm over a predetermined time period is the process of creating a cash flow projection. Accurate cash flow predictions help businesses anticipate, minimize, or prepare for negative cash flow while also pointing up areas of surplus. To guarantee you have an accurate cash flow forecast, follow these five steps before deciding which forecasting technique is ideal for your company
The process of cash flow forecast is not universal. Every company has its own objectives, sectors, and forecasting challenges. For instance, a seasonal business with high lows and sharp highs needs a different strategy than a company with a consistent cash flow throughout the year.
These five steps will help you to create an accurate cash flow forecast
Decide on the forecasting timeframe.
The time period has greater bearing on the kind of cash flow forecasting that is most suitable for your company than simply having the data to produce your forecast. A short-period forecast, medium-period forecast, long-period forecast, or mixed period forecast may be required. These time frames range from two to four weeks in the future to six to twelve months in the future.
Choose your forecasting technique for cash flow
The indirect and direct approaches are the two basic ways to forecast cash flows. The main distinction between the two approaches is that while indirect forecasting is based on projected balance sheets and income statements, direct forecasting uses actual flow data. Indirect forecasting is less dependable than direct forecasting, which is more accurate for forecasts up to 90 days in the future.
Choose a goal for your cash flow prediction.
The purpose or goal of your forecast must be established before you can create a cash flow projection. By doing this, you can produce business insights that can be used to take action as opposed to relying on forecasts that are inadequate for meeting your needs. Short-term liquidity planning, debt and interest reduction, covenant and critical date visibility, growth planning, and liquidity risk management are a few typical aims.
Find the information you need for your forecast.
You want to get the most precise data possible from your company’s backend in order to assure an accurate projection. You can get the majority of the cash flow information you require in your bank accounts, accounts payable, accounts receivable, or accounting software. For the forecasting period, you will normally need your opening cash balance, cash inflows, and cash outflows.
Verify your final forecast one last time
After finishing your cash flow projection, go back and double-check your numbers to be sure nothing was missed or written incorrectly. By doing this after each phase and after your final cash flow projection, you can maintain the accuracy of your forecasts and make informed business decisions.