What is Cash Flow Forecasting?

Cash flow forecasting is the process of predicting

cash flow (at least on a monthly basis) for the
purpose of managing liquidity needs and for
investment control. An accurate forecast provides
the investment official with the essential
information needed for making sound investment
decisions.
Cash flow forecasting is an estimate of receipts
and disbursements during a given period
A good cash flow forecast should answer the following questions:

•  How much cash is available?

•  When will it become available?
•  How long will it be available?
 What can you use it for?

• Cash flow forecasts can help predict upcoming

cash surpluses or shortages to help you make
• the right decisions. It can help in tax
preparation, planning new equipment
purchases or
• identifying if you need to secure a small
business loan.
 Is your business meeting expectations?

• You can use your cash flow forecast to check if

your business is meeting your expectations.
• Comparing your actual income and expenses
with your forecasts can identify areas where
• your business is over or under performing.
Reviewing your actual performance against your forecasts alerts you to any variance so
you can investigate and find out why there is a difference.
 Your sales are higher or lower than
forecast ?
you’d want to find out why.
Are your forecasts too high or too low?
Has a competitor changed strategy or
has a new competitor entered your market?
Do you have a customer service or quality
control issue?
• Using forecasts in this way allows you to
actively manage your business. It empowers
you to ask the right questions, and ultimately
make the right decisions.
 How to Build A Cash Flow Forecast

• First, start with your current cash and

investment balances. Then, look back at your
actual cash collection and expenditure history
by month. Apply the actual receipts collected
or expenditures made against your amended
budget for that year.
• Once you have looked back in history for three
years, apply the three-year monthly average
of those monthly percentages against the
current year’s budget.
Does history give all required info?
Yes for recurring operating revenues and
expenditures,Issues such as new revenue
sources or capital spending programs
(nonrecurring expenditures) have no history to
look back to, so you will need to work with
departmental personnel to determine when
funds will be coming in and when funds will be
going out.
Whenever you are working with historical data,
remember that changes in the economy,state
law, user fees, etc., can cause the past data to
give a false reading on future cash
positions.
That is why it is important to validate your
forecasting model.
 Forecasts work on assumptions
• If you have large variances between actual and
predicted you need to ask, “What caused the
variance? Do I need to change my
assumptions?
 How to Do a Cash Flow Forecast?
1.Decide on the time period your forecast
should cover.
2. Review your accounting history for revenue
and expenditures – get the general
picture.
3. Create a simple, one-page forecasting form to
begin tracking your revenue,expenditures and
investments.
4.Start with what you know and gradually build
up the reliability of your forecast.
Remember: keep it simple.
5. Monitor and fine tune your forecast. Beware
of fluctuations in near term numbers.
6.Watch the revenue side for significant changes.
Review heavy user expenditure patterns.
 Why organizations often find it difficult
to accurately identify a correct estimate.
Some factors that contribute to poor quality forecasts
include:
1. Manual processes
2. Seventy-five percent of treasury’s time spent on data
collection, which results in time lost for analyzing
positions and effective management
3. Inconsistent assumptions
4. Junior-level forecast responsibility
5. Lack of incentives and accountability in business units.
 Cash flow plans are living entities and must
constantly be modified as new information
becomes available on future cash inflows and
outflows.
Each budget should be analyzed and
the cash flow effect should be determined.
 Seven Ways to Enhance Cash Forecasting

1.Improve availability of data and quality of

information – The availability and quality of cash
management data is a particularly important
hurdle to enhance cash flow forecasting
 How to improve availability of da and
quality
• Establish Treasury workstations
• Account structure – using a single master account to collect
all cash inflows
• Treasury Intranet site – can improve the quality of input
and allow for easier sharing of information stored in
spreadsheet files. This may also assist in finding a “home”
for unclaimed and un-posted receipts and disbursements,
which improves the quality of bank account reconciliations.
• Use specific knowledge from business units – business units
generate their cash flow forecasts when creating their
annual plans because treasury
 Seven Ways to Enhance Cash Forecasting
2.Provide treasury with greater payment visibility by migrating vendors
to epayments.
3. Calculate the opportunity cost of inaccuracy – This helps to provide a
practical understanding of the importance of accurate forecasting.
4. Statistical analysis – comparing forecasts to the actual cash flow that
was
processed by banks can reveal correlations and consistent behavior. This
comparison can reveal opportunities for improving the predictability of a
forecast.
5. Use Treasury more as a planning resource or internal consultant and
less as a payment processor.
6. Continually monitor and adjust performance to the cash forecast.
7. Use technology that integrates bank data into forecasting solution.
 Hurdles to forecasting effectively

The first hurdle to overcome is to understand

what you should be forecasting. Too often,group
finance is presented with sales forecasts from
business units which are the result of applying
inconsistent monthly phasing formulae to
arbitrary sales targets for the year. What needs
to be forecasted is not sales, but the drivers of
sales, which ultimately reflect customer
behaviour.
 2
The second hurdle to overcome is to accept that
forecasting customer behaviour alone, however
accurate, achieves nothing. Forecasting is only a
useful activity if it in turn influences plans.
Customer behaviour analysis is often left to the
“multiple regressions”maths graduate in the
heart of the marketing or finance team.
 3
The final hurdle to overcome is to assume that
you will get a forecast exactly right. This
would be folly in times of predictability, but in
uncertain times it is madness to assume that
you will make all the right bets.Different
scenarios might play out and by considering
several, you will both improve your chances of
accuracy and your ability to react in a timely
manner.
 CASH FLOW ANALYSIS
A cash flow statement is a listing of cash flows
that occurred during the past accounting
period. A projection of future flows of cash is
called a cash flow budget. You can think of a
cash flow budget as a projection of the future
deposits and withdrawals to your checking
account.
 Reasons for Creating a Cash Flow Budget

Think of cash as the ingredient that makes the

business operate smoothly just as grease is
the ingredient that makes a machine function
smoothly. Without adequate cash a business
cannot function because many of the
transactions require cash to complete them.
 Cash Flow is not Profitability

Although closely related, cash flow and

profitability are different. A cash flow statement
lists cash inflows and cash outflows while the
income statement lists income and expenses. A
cash flow statement shows liquidity while an
income statement shows profitability.
 Cash Flow Budget Adjustments
(annual adjustments)
• The first step in analyzing cash flow is to add cash on hand to net cash flow. If the total
projected net cash flow for the year is still negative, some type of annual adjustments
must be made. Alternatives include:
• Sell more current assets Be careful here, though – reducing inventories may solve the
cash flow squeeze this year, but could result in even more severe problems next year.
•  Carry over operating debt to the following year.
•  Finance capital expenditures with credit, or postpone them until another year.
• Anticipated borrowing for capital assets can be included in the financing section
• under cash inflows.
• Reduce the size of intermediate and long-term debt payments by lengthening the
• repayment period or adding a balloon payment at the end.
• Convert short-term debt to intermediate or long-term debt by refinancing it as an
amortized loan.
.Reduce non-essential expenditures or increase non-farm income.
• Sell intermediate or long-term assets to raise cash.
 Seasonal Adjustments

• Even when the yearly net cash flow is positive, sizable deficits can occur in some
months.
• This is due to the seasonal nature of expenses in farming and the tendency to sell large
• quantities of a product at one time.
• Shorter term adjustments can be made when projected net cash flow is positive for the
• whole year but negative for certain months.
• These include:
• Shift the timing of some sales.
• Shift the timing of some expenditures.
• Increase short-term borrowing in periods with negative cash flow, and project
repayment in periods with positive cash flow. Remember to add interest charges to
payments.
• Delay the due date of fixed debt payments to match periods with positive net cash
flows.
 Monitoring Cash Flows

• Review your cash flow budget from time to

time during the year. Prices and costs may
differ from your estimates, or production
plans may change. This will help you anticipate
changes in your needs for cash and credit later
in the year. You may even need to prepare a
revised budget for the remainder of the year.
 Budgeting Major Investments

• A cash flow budget also can be very helpful in

evaluating major capital investments or
changes in the farm business. Examples are
purchasing land, building new hog facilities,
Often it will be necessary to develop two
budgets: one for a business year after the
investment or change in the business is
complete, and one for the intermediate or
transition year (or years).