What is Cash flow forecasting?

Ever had the scenario where you were in the middle of a long journey and the fuel runs out with no pumps nearby? You would probably call someone for help and there will be people who may take advantage of the situation. One would really like to avoid such a scenario.

The same kind of situation may arise in a business world where instead of fuel the thing will be working capital and instead of a vehicle, it will be your business. Yes, as you all, businessmen, know cash is what fuel is to cars or food is to living beings, it is important to replenish it from time to time. For a long time in the business world, it is considered illogical to keep a major stock of cash at hand but advised to keep some cash in hand for accidents.
Businessmen often get confused about how they should manage their funds. It is the balance and timely flow of funds that businesses should really strive for. To overcome the problem of how to create a balance in cash flow accountants have evolved the method known as cash flow forecasting.

Cash Flow Forecasting is the same as trying to view the future of the company’s future financial position by making speculations on anticipated payments and receivables making it a core planning component in the financial management and decision making committee of a company. A business running without the accountants making the cash flow forecast is the same as a soldier in a battlefield without knowledge of where s/he will get his/her ammo or basic necessities. In short, it is being unprepared for the future if the business isn’t creating cash flow forecast statements.

A cash flow forecast document created by accountants is of different types according to the needs of a firm. The first type of cash flow forecast is a daily cash flow forecast which is to ensure that your business’ working capital is enough to cover your expenses for the immediate day or two. This information is vital to treasurers to make the decision to invest any surplus overnight in an investment instrument with better interest than the standard bank account.

Another type of cash flow forecast, which is, short-term cash flow forecast, provides comprehensive information on short-term accounts payable and accounts receivable requirements data to the treasurer to be proactive as opposed to reactive with possible investment opportunities to help improve the bottom line. This forecast can also be used to make longer-term strategic forecasts. Another type, medium-term cash flow forecast, is extremely useful to businesses that operate in industries that have volatile demand throughout the year.

This forecast helps in making long term financial strategies, like investment or expansion planning for a firm. Long-term cash flow forecasts are essentially a look between three to five years into the future. A long-term forecast provides intelligence on when and where the business is straying from its plans, the possible causes, and where there has been a cash flow more than planned helping the business manage its longer funding decisions, such as bond issuance, for example. At Good Kiwi Accounting Services, we believe in maintaining steady cash flow for our clients, so cash flow forecasts are given due importance and are managed according to client’s needs to help them make better decisions according to their future plans.