Forecasting Cash Flow

The process of calculating how much money will flow into and out of a company over a given time frame.

Sid Arora

Reviewed by

Sid Arora

Expertise: Investment Banking | Hedge Fund | Private Equity


September 5, 2023

What Is Forecasting Cash Flow?

Forecasting cash flow (FCF) is part of the financial statement process, which is about accounting records demonstrating how your organization did financially during a specific time.

However, companies can use that previous data to predict their future financial performance. Financial statement forecasting is what that is called.

Four fundamental financial statements are available:

Income Statement, Balance Sheet, Cash Flow Statement, and Statement of Retained Earnings.

To anticipate the company's future financial health, small firms may want to forecast their income statement, balance sheet, and cash flow statement.

The process of calculating how much money will flow into and out of a company over a given time frame. A precise cash flow prediction enables businesses to estimate their future financial balances, prevent cash shortages, and maximize the return on any cash surpluses.

The financial staff of a company is often in charge of forecasting cash flow. However, especially in larger firms, creating a prediction necessitates input from numerous organizational stakeholders and data sources.

Here's how to create a cash flow forecast that will offer your business the clarity it needs to manage its Cash well.

How to calculate Forecasting Cash Flow?

The most accurate technique to predict your company's cash flow will depend on your business goals, the demands of your management team or investors, and the readily available information within your company.

For instance, a company that wants to monitor debt obligations weekly will require a different forecasting strategy than one that aims to obtain clarity over quarter-end covenant positions.

Here are the steps we advise taking to create a cash forecasting model and the types of data you'll need to have access to do so.

1. Establish Your Forecasting Goals:
Identifying the business purpose that the cash flow forecast should support is the first step to taking meaningful business insights from the estimates. For example, we discover one of the following goals is where firms frequently employ cash predictions.

  • Planning for short-term liquidity: involves daily cash flow management to make sure your company can pay short-term obligations.

  • Interest and debt reduction: ensure the company has adequate Cash to cover any loans or debt payments.

  • Agreement and important date recognition: project your cash levels for important reporting dates like the end of the year, the quarter, or the month.

  • Liquidity risk management: involves gaining visibility into potential future liquidity problems so you may handle them sooner.

  • Growth planning: Make sure the company has enough operating Cash to pay for actions that will support future revenue growth.

Depending on the type of your organization, you should choose the appropriate target to base your projection on. For instance, organizations with debt will benefit from developing a cash projection that aids in their ability to plan for upcoming payments.

However, unless they are similarly short on Cash, they might not need to create a projection that supports short-term liquidity planning.

2. Determine the Prediction Period.
The next thing to think about is how far into the future your forecast will seem once you've chosen the business objective you hope to support with it. Again, the availability of information and prediction duration are typically trade-offs.

In other words, the prognosis is more likely to be vague or inaccurate the further into the future. Therefore, picking the appropriate reporting period can significantly affect the precision and dependability of your forecast.

Here are the forecasting intervals we advise using and the business goals they work best for:

A. Short-term forecasting:

Short-term forecasts typically cover the next two to four weeks and include a breakdown of daily cash payments and receipts. 

As one might anticipate, short-term predictions are frequently best suited for short-term liquidity planning, when it's crucial to have day-to-day specificity to make sure a company can pay its debts.

B. Medium-term predictions: 

These are very helpful for managing liquidity risk, reducing debt, and keeping critical dates visible because they typically look two to six months into the future. The rolling 13-week cash flow prediction is the most popular medium-term forecast.

C. Long-term projections: 

Annual budgeting processes frequently begin with longer-term forecasts, which typically look 6 to 12 months out. 

They're also crucial for determining the money needed for long-term projects, capital initiatives, and growth strategies.

3. Select a forecasting technique:

The two main categories of forecasting techniques are direct and indirect. The primary distinction between them is using accurate flow data by direct forecasting instead of anticipated balance sheets and income statements by indirect forecasting.

The cash flow forecasting window you chose above and the type of data you have at your disposal to construct your forecasting model will determine which forecasting technique is best.

Below is a list of the applications for which each technique is most valuable:

A. Direct Method: 

It is less common than the indirect method, the direct method for estimating cash flow might be much more straightforward. It's less common because conventional reports from a company's accounting software can't be made utilizing it. 

However, if you're planning and making a prediction, you're not reliant on data from your accounting system, so that that option might be preferable.

The drawback of using the direct method is that some bankers, accountants, and investors might want to see a cash flow estimate using the indirect method. However, the direct approach is accurate.

The direct approach to predicting cash flow is based on the following straightforward general formula:

Cash Flow = Cash Received - Cash Spent

B. Indirect Method:

Since you can easily collect the information for the report from your accounting system, the indirect technique has been more widely used to create cash flow statements.

You obtain your net income and then add back factors that impact profits but not Cash to produce the indirect cash flow statement. Additionally, you eliminate items like sales that have been scheduled but not yet paid for.

4. Gather the Information for Your Cash Flow Forecast:

The bulk of business objectives that firms use forecasts to support can be met with the best accuracy when direct forecasting is used. Therefore, in this section, we'll concentrate on where to find actual cash flow data for your forecast.

In the end, how your company handles its money will determine the best place(s) to get cash flow data for your prediction.

However, you may generally find the accurate cash flow information needed to create your projection in your bank accounts, accounts payable, accounts receivable, or your accounting software.

What you should get from those systems is as follows:

  • The forecasted period's initial cash balance is typically obtained from the most accurate and up-to-date representation of current positions.

  • Cash inflows for the anticipated period: Your cash inflows are typically mainly determined by anticipated sales receipts from the forecasting period.

  • Financial outflows throughout the forecasted time frame: We advise tracking earnings, rent, investments, bank fees, and debt repayments. However, you can incorporate anything pertinent to your firm.

  • Financial inflows categories are Intercompany funding, dividend income, revenues from divestitures, and inflows from third parties.

The difference between Cash Flow and Profits

Profit and cash flow are crucial financial indicators for businesses. However, it happens frequently for people new to finance and accounting to mix up the two terms.

Making critical judgments about a company's performance and financial health requires an understanding that cash flow and profit are not the same.

It is simpler for investors to determine if a profitable firm is a viable long-term investment based on its potential to remain solvent during economic downturns when they grasp the difference between profit and cash flow.

Understanding how the phrases relate can help business owners and entrepreneurs make crucial decisions, such as how best to pursue growth.

  • Cash Flow: The movement of money that a business gets and sends describes the company's money circle. Money flows in and out, but other elements of the financial picture are not considered.
  • Profits: The positive financial difference between a company's revenue, operational costs, and current liabilities is profit. 

A corporation will examine its total revenues, or incoming cash flow, after a financial period and deduct its expenses, or outgoing cash flow.

There is either a gain or a loss in the differential. The number shows the company's profits if the difference is positive; if it is negative, the company will have lost.

The various forms of cash forecasting tools

You can overcome common forecasting difficulties with efficient cash flow forecasting tools. They support you in managing and monitoring your company's current and prospective cash flows.

This enables one to decide on investments and strategies for their company more wisely.

1. Simple tools for small and medium-sized businesses

According to market data, 63% of American businesses used spreadsheets for planning and reporting in 2018 alone. In addition, spreadsheets are still regarded as the most fundamental, go-to tool for cash flow forecasting, even though this number was dropping.

On a fundamental level, the two primary (free) providers of cash forecasting tools are:

Your spreadsheets can be as complex as you like. However, most smaller businesses have historically performed their cash flow forecasts on spreadsheets.

They have less complex setups and fewer data sources. As a result, getting the information you require is simpler.

Spreadsheets have the benefit of being very efficient and affordable. However, they become unmanageable and start consuming a lot of your team's resources as your firm gets bigger and you start using many banks and other source systems like ERPs.

2. Moderate tools for small and medium-sized businesses:

Several intermediate cash forecasting tools are more beneficial for smaller and medium-sized businesses than essential tools.

They frequently serve as a supplement to spreadsheets; however, occasionally, they might replace them. Below are some of the essential tools for it:

A. Microsoft POWER BI:

It is a technology that can gather data from many sources and let you view it through dashboards. It's a valuable tool, but it takes some getting accustomed to and training. 

Power BI integration with your systems, data import, and report creation might still be labor-intensive manual processes.
The systems that Power BI can link to are few. In addition, there are deficiencies, particularly in the bank and ERP interfaces typically needed by larger organizations.


Probabilities are that Causal can assist you with gathering such data in one location if you have an accounting system, a CRM, and some data storage system. 

Their data visualization tool lets you better grasp the combined data from your connected places.

Causal, like Power BI, cannot link to financial organizations like banks, which are frequently necessary to understand your cash status better.


When merging the data from various spreadsheets, Sheetgo is a valuable tool. However, the more financial data spreadsheets you have, the more difficult it is to combine them and create precise cash flow estimates.

Sheetgo does not eliminate the need for manual data extraction from source systems. Instead, it was more designed as an Excel or Google Sheets integration tool.

D. Nomentia:

Nomentia Liquidity is a fantastic choice if you're searching for a cash flow forecasting solution that can link to various source systems, banks, and ERPs.

You may see your previous, present, and future cash positions thanks to Nomentia Liquidity. Each client's data is automatically gathered by Nomentia from various source systems and presented in a specific way. 

You won't have to worry about manual work or integration issues because the deployment is done with a dedicated customer specialist.

Advantages of Forecasting Cash Flow

Forecasting your cash flow will help your business vision and strategy to be on a solid base for those reasons

1. Enabling more predictable business growth: 

When a company expands through investment, it typically does so at the expense of cash flow. 

Since cash flow projections make it easier for firms to plan their cash surpluses efficiently, they also make implementing a growth strategy more predictably simpler.

2. Prepare for any potential cash shortages: 

By using forecasting, you may identify cash gaps before they affect your company, giving you enough time to make up for the shortfall in your cash flow. You can also take action before it occurs by foreseeing this. 

To prevent the cash deficit from harming your company, it could be necessary to reduce operational expenses or put off replacing your equipment until you're out of the woods. 

Even though you may modify some consumer payment conditions or look into alternative financing options, the most crucial thing about a cash shortage is that you'll be able to predict it with accurate forecasting.

3. Monitor your spending money: 

By tracking your company's expenses without doing it manually by using cash flow forecasting.

For instance, you can determine your guaranteed total outgoings if a specific sum is scheduled to depart your business each month, such as payment for utility bills.

If that number is larger than it should be, it will impact the total amount paid out, and since everything is tracked, you will be able to tell which part of the company you are overpaying quickly. 

If forecasting hadn't been used, you might not have found this mistake if you had checked manually.

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Researched and authored by Ranad RashwanLinkedIn

Reviewed and Edited by Kevin Wang | LinkedIn

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