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Cash Flow Forecasting in Financial Model

Cash Flow Forecasting

Cash Flow Forecasting is done to forecast the company’s future financial position. In terms of the financial management of the company, it is considered 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:

  • Importance of encountering errors in cash flow forecasting
  • Cash Flow Forecasting on the basis of projected financial statements
  • Cash Flow Statement on the basis of which equity valuation can be done

so let’s get down to it:

Cash Flow Forecasting
Cash Flow Forecasting in Financial Model

Reasons Behind Cash Flow Forecasting

  • Short-Term Liquidity Planning
  • Budgeting
  • Reduce the Debt Burden
  • Forecast the Financials of the Company

Methods of Cash Flow Forecasting

There are mainly two methods of forecasting cash flow, i.e. Direct and Indirect.

  • Direct Method

This method is used to meet the purpose of short-term liquidity management. Also, it reflects the real-time cash forecasts as possible.

  • Indirect Method

While the Indirect method of cash forecasting is longer in nature and uses project financial statements such as balance sheets & income statements.

Direct Forecasting Indirect Forecasting
Long-Term in Nature Cash Requirement to meet the working capital Obligation
Cash Requirement to Meet the Long Term Growth Strategy Cash Requirement to Meet the Long-Term Growth Strategy
Forecasting through Debtor / Creditor Analysis Forecasting through Projected Financial Statements

Process of Forecasting in Financial Model

The process involves three step forecasting framework.

Financial Modeling Process

Forecasting Financial Statements

A cash flow statement can be derived from 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.  

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Activities Inclusions:      

  • Operating Activities – Revenue & Operating Expenses
  • Investing Activities – Sale or Purchase of Assets
  • Financing Activities – Issuance of Shares & Raising Debt

Likewise, after forecasting of above-mentioned activities, we will ascertain net cash movement.

Cash Flow Statement

Cash Flow from Operating Activities

In Forecasting, the first step is to forecast cash flow from operating activities which are derived from the financial statements. Under this, the projected balance sheet is used to estimate changes in operating assets & liabilities.

Operating Activities

Cash Flows from Investing Activities

Investing Activity covers the 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 the acquisition of fixed assets.

Investing Activities

Cash Flows from Financing Activity

Once the forecasting of operating activities is done, the next step is to forecast financing activity. Financing activities are predicted by comparing the 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.

Forecasting cash flows is very crucial for the success of every business which requires extensive knowledge and professional expertise.

Cash Flow Management

It is important for companies to effectively manage cash flows. Therefore, you can outsource cash flow management services to Enterslice to gain a competitive advantage.

Further, Cash Flow Management Services includes the following:

  • Forecasting Cash Flows
  • Cash Flow Management
  • Financial Risk Management
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Sample of Cash Flow Calculation

Cash Flow Prediction is all about predicting money in advance.

Below we are highlighting key cash flow assumptions:

Projected Cash Flows

Monthly Cash Flow Forecasting

cash flow forecasting

Quarterly Cash Flow Forecasting

Cash Flow forecasting

Positive & Negative Cash Flow

Cash flow will be positive when cash inflows will be more than cash outflows. In case cash outflow is more than cash inflows then it is said to be negative cash flow.


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, organizations 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 the financial strength to survive during a cash flow crisis. However, if you devote expert resources to forecasting cash flows, then it may save the organization from the cash crisis.

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