Cash Flow / Advanced Forecasting

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Cash Flow / Advanced Forecasting

Cash flow management is a critical component of overall treasury management that is crucial to both the long-term and short-term success of a business.

It doesn’t matter how profitable your business is; if you don’t have the working capital on hand to meet your financial obligations when you need it, it could spell out trouble and potentially even lead to business closure. In fact, it’s cited as the number one reason small businesses fail on SCORE – responsible for 82% of these failures.

TFG has already written about how cash flow forecasting is used to inform risk management; this article will now take a closer look at exactly what cash flow is, why it’s important, and what cash flow forecasting looks like in practice.

Cash Flow

An Introduction to Cash Flow

Cash flow refers to the movement – or ‘flow’ – of money in and out of the business. A ‘positive cash flow’ is when more money is coming in than going on; a ‘negative cash flow’ is the reverse of this.

There are different types of cash flow; three that you should be aware of are:

  • Net cash flow – the most basic type of cash flow which considers net cash incomes and outgoings.
  • Free cash flow – the cash that is left after a business has paid capital expenditures and operating expenses.
  • Discounted cash flow – a cash flow which accounts for the time value of money by discounting it against a predetermined rate.

It’s not enough to simply have a budget which predicts how much cash will go in and out of your business, businesses must also try to predict when this cash will go in and out so that they know how much working capital will be available to them at any given time. This is known as a ‘cash flow forecast’.

Why is Cash Flow Forecasting Important?

Cash flow forecasting enables you to predict the amount of working capital you will have at any given time, which you might need to pay your creditors or staff, purchase inventory stock, or pay your tax bills.

If you have an accurate and complete cash flow, you should be able to predict when you’ll have a surplus and when you’ll have a deficit. This is important as it will help you to:

  • Identify potential shortfalls
  • Prevent or minimise the impact of these shortfalls
  • Utilise any cash surpluses effectively
  • Access funding by proving you will be able to repay it in the future
  • Ensure you have cash on hand to meet your financial obligations.

Which Types of Businesses Need a Cash Flow Forecast?

All businesses require a cash flow forecast if they want to ensure they stay profitable and open.

However, there are some instances in which having an accurate and thorough cash flow forecast becomes even more important, such as:

  • When you’re starting a new business. During this time, you’ll likely have lots of expenses and overheads as you’ll be spending money on marketing and growing your customer base. You’ll also probably have minimal sales at this point and, as such, you may have a negative cash flow. A cash flow forecast becomes critical here so that you can plan ways to get cash from other sources, such as credit lines, ahead of time.
  • If you’re a seasonal business. Seasonal businesses have large changes in sales at different times of the year so knowing how much you need to hold back for low sales periods becomes critical.

What Should a Cash Flow Include?

Cash flow forecasts can be very simple or very complicated, depending on the needs, size and nature of the business. Small businesses may be happy with a relatively basic cash flow forecast, whereas large corporations typically need to devote much more time and effort into making their forecast as detailed as possible.

It also depends on the length of time being forecasted. There will typically be less information available to inform forecasting for long periods of time, so these cash flows will usually include much less information and more generalised predictions.

There is no one-size-fits-all model of what to include in a cash flow forecast, as the cash going in and out of different businesses can vary greatly depending on the nature of the business.

However, at its most basic, a cash flow forecast will include an opening balance, cash revenues and cash expenditures. These cash revenues and expenditures might consist of:

  • Money coming in from your sales forecast based on when you expect your customers to pay.
  • Non-sales income such as loans, asset sales, investments, etc.
  • Money going out from your fixed running costs, such as staff wages, inventory, etc.
  • Other costs, such as buying new equipment, etc.

The more detailed your cash flow forecast is, the more accurate it is likely to be.

Advanced Cash Flow Forecasting

Advanced forecasting is being more precise and accurate in your cash flow predictions.

This involves taking additional steps like:

  • Carefully taking into account factors such as historical trends and prediction patterns, and using this data to make a create a more accurate and informed forecast.
  • Predicting when your clients will actually pay their invoices based on historical data.
  • Accounting for different ‘what-if’ scenarios and possible changes in your business.
  • Considering external factors such as a change in commodity prices or exchange rate which may affect the pricing of components needed to operate your business.

Carrying out advanced cash flow forecasting means you can afford to be more aggressive with using this forecast to inform your investment decisions as you’ll have a higher degree of certainty that your predictions are accurate and that these decisions won’t damage your business.

Businesses are increasingly relying on advanced accounting software and cash flow tools to help them to do this. By digitising the cash flow forecasting process, businesses can be more accurate and detailed in their forecasts whilst minimising the costs of this.

It’s much easier to accurately predict cash flow if you have a strong and effective policy regarding accounts receivables and accounts payable. This is the responsibility of the cash management sub-function. For more information on this, see our Cash and Liquidity Management guide.

Cash Flow Statements

Cash flow statements are similar to forecasts, except that they look at the past – not the future.

A cash flow statement is a record of the cash that has gone into and out of your business over a period of time. This could be the previous month, quarter, or the whole year.

Here’s why you need one:

  • Your investors and lenders will want to see it.
  • It can highlight issues with your forecasting ability
  • It might contain patterns which can inform future cash flow forecasts

It’s important to maintain both an accurate cash flow statement and an accurate cash flow forecast. Do this well, and you’ll have successfully overcome one of the biggest trip-ups that cause businesses to fail.

Cash flow is just one piece of the puzzle when it comes to overall treasury management. To find out more about other important aspects of this, see our information hub.


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About the Author

Mark heads up the trade finance offering at TFG where his team focuses on bringing in alternative structured finance to international trading companies. Prior to joining TFG (, Mark qualified as a lawyer with a top ranked global trade and structured commodity finance team.

Mark has previously advised commodity trading firms, banks and alternative capital providers on international structured trade financings, pre-export, prepayment and limited recourse structures – notably in the oil, soft commodities and metals sectors. This has included mining finance projects, structured letter of credit facilities, receivables discounting and forfaiting agreements.

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