Advantages of cash flow forecast

cash flow forecasting can be defined as a partial plan of the company’s financial position in the near future. It tracks the incoming and outgoing cash from the business within a specified timeline. Cash flow forecasting can also be defined as an estimation of what the company’s cash position will look like in the near future, based on the company’s past performance and other data.
One of the advantages of preparing a cash flow forecast is the insight it gives you when predicting the timing of your future investments. There are also many other advantages of cash flow forecasting, some of which are mentioned below:

Advance identification of potential shortfalls existing in the cash balance : a cash flow forecast can be used to identify potential shortfalls or cash related challenges the business may face in the near future. As a result of preparing such a forecast, the company gets to plan ahead, with confidence.

Planning expenses in accordance with cash flows : this is also an integral part, since it helps the company to plan their expenses around cash they are predicted to have at a given point in time. If there are any identified cash flow related challenges, then they can look at their options in advance of making commitments.

As a financial planning tool : cash flow forecasts are mainly used as a financial planning tool, in order to set expectations for the near future.

For creditors : cash flow forecasts can be required by some creditors and companies in order to assess the ability of the business to pay back its debts.

Identify delayed payments from customers : preparing a forecast enables businesses to see how quickly their customers are paying outstanding debts. This can be integral to the success of a business as turnover is vanity, profit is sanity but cash is reality.

External stakeholders such as banks may requre forecast : many lenders will ask for a regular cash flow forecast. This enables your lenders to assess the business and gives them an idea of how well you are managing your cash flow.

Planning for surplus cash : surplus cash may be a luxury for many, but identifying when you may be in a position where you have surplus cash, can be just as important as knowing when you might have potential shortfalls. Making the right decisions and investments will be vital to the future success of the business.

Therefore, cash flow forecasts can be regarded as a highly important tool and there are several advantages of a cash flow forecast which can be utilised in order to achieve higher thresholds of business efficiency in the increasingly competitive business world.