Importance of Cash Flow Forecast

A cash flow forecast is a tool used in financial planning or budgeting to show the estimated cash inflows and outflows of a business or a specific project. Understanding the forecasted cash flows of a company is a vital part of its finances. Cash flow forecasts typically consist of estimates for the upcoming 12 months but can also include shorter or longer periods. The cash flows of a business play a critical role in its success, in addition to its profits. Therefore, companies need to keep a close eye on their cash flows, whether present or future, to ensure survival in the long run. A cash flow forecast acts as that tool that can help businesses proactively control their cash matters and identify any deficiencies on time.

Importance of Cash Flow Forecast

A cash flow forecast can provide businesses with many benefits. Some of the points that signify its importance include the following:

Planning tool : First of all, the cash flow forecast acts as a planning tool. By planning its future cash flows, a business can also predict future cash deficiencies and prepare for it. Similarly, cash flow forecasts can help a company detect any future cash surpluses, which the business can invest in to increase revenue. Either way, the cash flow forecast can enhance its future planning and activities.

Monitoring tool : Once businesses prepare a cash flow forecast, it can also act as a monitoring tool. They can use the forecast as a benchmark against which they can compare actual performance. In the absence of a cash flow forecast, businesses can’t identify any deficiencies in their cash inflows or outflows. In this regard, the cash flow forecast plays a similar role to budgets.

Tracking payments and receipts : Tracking payments and receipts is vital for businesses of all sizes. One late receipt or payment can lead to cash flow problems. However, through a cash flow forecast, they can easily track all these inflows and outflows. The cash flow forecast also allows businesses to understand how any cash transactions’ anticipated timing can impact their operations.

Ensuring the timing of cash flow is sufficient : The cash flow forecast also helps businesses determine whether the timing of anticipated cash inflows and outflows is sufficient. While cash flows play a critical role in a business’s success, the timing of these cash flows is also crucial. Therefore, a cash flow forecast can help businesses in decision-making regarding credit control, payment policies, or other cash related matters.

Helps in decision-making : Lastly, a cash flow forecast can also help in the decision-making process of businesses. As stated above, it can help them with what course of action they can take in the event of cash shortage or cash surplus. Similarly, it can help with decisions related to financing different aspects of a business. Furthermore, companies can use the cash flow forecast to estimate the effects of various decisions on their operations.

Conclusion

A cash flow forecast estimates the cash inflows and outflows of businesses. It can play a vital role in the success of the company. Among other things, cash flow forecasts act as a planning and monitoring tool, help track payments and receipts, ensure the timing of cash flows is sufficient, and help with decision-making.