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Cash Flow Forecasting is done to forecast the company’s future financial position. In terms of financial management of the company, it is considered as the core planning component. Cash flow forecasting is necessary for the projection of the financial position of the company on the basis of the anticipated payments and receivables. In this article, you will be able to understand the following:
so let’s get down to it:
There are mainly two methods of forecasting cash flow i.e Direct and Indirect.
This method is used to meet the purpose of short term liquidity management. Also, it reflects the real time cash forecasts as possible.
While, Indirect method of cash forecasting is longer in nature which uses project financial statements such as balance sheets & income statements.
|Direct Forecasting||Indirect Forecasting|
|Short Term in Nature||Long Term in Nature|
|Cash Requirement to meet the working Capital Obligation||Cash Requirement to meet the Long Term Growth Strategy|
|Forecasting through Debtor / Creditor Analysis||Forecasting through Projected Financial Statements|
The process involves three step forecasting framework.
A cash flow statement can be derived from the financial statements such as balance sheet & income statement. While, before forecasting cash flows from investing & financing activities, first we have to forecast cash flow from operating activities.
Likewise, after forecasting of above mentioned activities, we will ascertain net cash movement.
In Forecasting first step is to forecast cash flow from operating activities which are derived from the financial statements. Under this, projected balance sheet is used to estimate changes in operating assets & liabilities.
Investing Activity covers forecast of specific fixed assets or plant & machinery. Forecasting of fixed assets is done assuming assets are fully depreciated when disposed of and there is no purchase or sale of business. We will cover the forecasting of acquisition of fixed assets.
Once the forecasting of operating activities is done, the next step is to forecast financing activity. Financing activities are predicted through comparing projected year with the previous year. For instance, Dividend cash flows can be included either in operating activities or in financing activities. However, it depends upon organisations but it should be reflected in financial statements.
It is important for companies to effectively manage cash flows. Therefore, you can outsource cash flow management services to Enterslice to gain competitive advantage.
Further, Cash Flow Management Services includes the following:
Cash Flow Prediction is all about predicting money in advance.
Below we are highlighting key cash flow assumptions:
Monitoring cash flows should be a priority of every organization. Moreover, Once you are done with the forecasting of cash flow then you have to compare it with your actual cash flow for that period. For accurate forecasting of cash flows, organization need to establish communication lines, identification of inflows & outflows, predict several scenarios and comparison of the results. However, forecasting is a critical process. In addition to this, organizations must have financial strength to survive during cash flow crisis. However, if you devote expert resources in forecasting cash flows then it may save organization from the cash crisis.
We at Enterslice have a team of expert professionals who can help you in cash flow projections. Further, we can also schedule a consultation to understand your organization & challenges. For that, contact us here.