Everything You Need to Know About Cash Flow Forecasting

Often for growing businesses, the best way to view the present state is in future terms. Thanks to cash flow forecasting, businesses can get different snapshots of their financials, allowing them to anticipate the best way to scale or manage their companies in the short and long term.

So, what exactly is Cash Flow Forecasting?

Think of cash flow forecasting like a business’s crystal ball. It’s a report that projects incoming and outgoing funds at some particular point in the future. Companies are able to leverage this kind of forecasting to estimate what their cash flow will look like at any given time. 

In building out future plans, companies can better anticipate their financial status and therefore make more efficient and strategic decisions to benefit their business overall. 

What is the difference between direct and indirect forecasting?

There are two different types of cash flow forecasting: direct and indirect. Each type of forecasting utilizes different sources of information to determine a company’s future financial state.

Direct cash forecasting is all about focusing on short-term incomes and expenses that the company will have. 

These types of forecasts generally show the amount of money that is required to operate normally and maintain a good day-to-day budget. Typically created through an in-depth analysis of the accounts receivable, accounts payable, debts, and credit, they focus heavily on analyzing statistics about the company’s current financial state, and assess the full value and ability of the company to deal with current financial incomes and outcomes. 

Indirect cash forecasting is more centered around long-term funding for projects, strategies, and overall expansion.  

Unlike short-term forecasting, long-term forecasting looks at a variety of data points — mostly focused on what is projected rather than on the current financial state of the company. These reports might include market trends, competitive analysis, and projected revenue sources. Using projected balance sheets and income statements, this type of forecasting is a lot less based on hard facts, and more on possible estimations of what the future situation might be for the company. 

How far into the future should I forecast?

It’s up to you! The good news is there are different types of cash flow forecasts depending on how far into the future you’re looking to scope. You might want to conduct multiple forecasts simultaneously as you build your business. Generally speaking, here are the four time periods of forecasting most companies find useful: 

Short-term forecasts

Think of short-term forecasts as the most up-to-speed insight into your active business. These reports tend to look 2-4 weeks in advance so you have a sense of where the business will be in the coming month. Short-term forecasts tend to come with a daily breakdown of payments and receipts so your accounting team is able to see cash flow at a granular level. Short-term forecasts are helpful for liquidity planning so you can ensure you have the means to pay vendors and buy more inventory.

Medium-term forecasts

As you look at the health of your finances in a broader sense, you might want to run some medium-term forecasts. These reports tend to look 2-6 months in the future so that you can make appropriate quarterly strategy decisions. Forecasts like these are useful for lowering your debt and interest, managing liquidity risk, and seeing visibility into key dates and seasonality for your business. The most common medium-term forecast is a rolling 13-week cash flow forecast.

Long-term forecasts

Long-term forecasts typically look 6–12 months into the future. For most companies, they tend to come about around annual discussions regarding budgeting, growth strategies, and capital projects. By forecasting far in advance, you are more able to anticipate the type of cash flow required to complete all of next year’s goals. Because they’re conducted so far in advance, long-term forecasts tend to leverage indirect forecasting. 

Mixed-period forecasts

Try out a few of them! Mix-period forecasts are hybrid-models of forecasting that change over time. For example, you might want to report on cash flow every week for the first three months of the year, but then switch to month-to-month reporting for the next quarter. Mixed-period forecasting is helpful for companies that are evolving quickly. 

How Settle Can Help You with Cash Flow Forecasting

Cash flow management is quite literally what we do. We help businesses streamline their finances so that they can scale faster. As you anticipate what’s to come next for your business — be it in a week or a decade — Settle is here to ensure your vendors are getting paid on time and that you have flexibility in your finances.

Settle enables cash flow (for both payers and vendors) to move more efficiently. That means fewer delays and hiccups, each of which could compromise the effectiveness of your cash flow forecasting. Instead of sorting through invoices and comparing due dates, you can focus on building your business and planning for what’s next.


Sources: 

https://www.accountingtools.com/articles/cash-flow-forecasting.html

https://www.cashanalytics.com/what-is-cash-flow-forecasting/

https://www.wellsfargo.com/biz/wells-fargo-works/financial-management/managing-cash-flow/creating-a-cash-flow-projection/