What Is a Cash Flow Forecast?

What Is a Cash Flow Forecast?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A cash flow forecast is a plan that projects into the future to show how much money a business expects to receive and to pay out over a specific time period. It usually includes projections for income from sales, expenses, overheads, and any other cash inflows or outflows. The main reason it’s done is to help the business plan its future cash requirements to avoid any potential shortfalls.

Related Questions

1. Why is cash flow forecast important for a business?

A cash flow forecast is helpful for a business as it allows them to plan for their future. With it, they can identify periods when the business might be cash-low and plan on how to navigate through those times. Moreover, it helps in decision-making when considering expenditures such as investments, expansions, or hiring.

2. How to prepare a cash flow forecast?

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To prepare a cash flow forecast, start by outlining your projected sales for each month. Next, list all your expected cash inflows, like payments from customers, loans, or other income. Then list your expected cash outflows like costs, expenses, payments to suppliers or any other cash expenditures. Finally, subtract the total cash inflows from the cash outflows to find the net cash flow.

3. What is the difference between cash flow and profit?

While both cash flow and profit are measures of financial health, they refer to different things. Profit measures the amount of revenue that remains after subtracting all the business’s costs and expenses. On the other hand, cash flow is the inflow and outflow of cash to and from a business over a period of time.

4. How can a business improve its cash flow?

Businesses can improve their cash flow in several ways. They might speed up billing, reduce their inventory, negotiate better terms with suppliers, increase sales, reduce expenditures, or improve their collections process.

5. What is a cash flow statement and how it is different from a cash flow forecast?

A cash flow statement is a document that shows the exact amount of cash a company has received and paid out during a specific period. It is different from a cash flow forecast, which is a projected plan of the cash inflows and outflows over a future period. The statement is used for reviewing the past cash flow, while the forecast is done for planning the future.