What is a cash flow forecast?

A cash flow forecast is a financial tool used by businesses to estimate the amount of cash that is expected to flow into and out of the business over a specific period, typically on a monthly or quarterly basis. It provides a projection of the company's future cash inflows (such as sales revenue, loans, investments, etc.) and cash outflows (such as expenses, salaries, loan repayments, taxes, etc.) based on anticipated activities and historical data.

The primary purpose of a cash flow forecast is to help businesses manage and plan their finances effectively. By analysing the expected cash flows, businesses can anticipate potential cash shortages or surpluses and make informed decisions to mitigate risks or take advantage of opportunities.

A cash flow forecast typically includes three main sections:

Cash inflows - This section includes all the anticipated sources of cash, such as sales revenue, loan proceeds, investment income, and any other income streams.

Cash outflows - Here, all the expected cash outflows are listed, including expenses, salaries, loan repayments, taxes, and other payments.

Net cash flow - This section calculates the net cash flow by subtracting the total cash outflows from the total cash inflows. A positive net cash flow indicates a surplus, while a negative net cash flow indicates a deficit.

The cash flow forecast helps businesses identify potential cash gaps or excesses, allowing them to plan for financing needs, adjust their operations, or implement strategies to optimise cash flow. It is an essential tool for budgeting, financial planning, and managing liquidity.