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Cash & Power: How to Create an Effective Cash Flow Forecast

Posted on 2.13.2016

:: By Kevin Hsu, Kepion Solution ::


Cash is the lifeline of any business organization, and ensuring how it flows in and out of yours is essential for success. Thousands of businesses have ceased to exist due to unexpected cash flow predictions; however, by planning and forecasting your organizational expenditure, you can give your business the best chance to survive and succeed in the long run.

Cash flow forecasting, though sounds daunting, is actually a deceptively easy process that effectively accounts for utilization of the available information in hand to predict how much money will flow in and out of the business at any given point of time. Here are some tips for creating an effective long-term cash flow forecast:

List the assumptions

Forecasts are mostly driven by assumptions and hence, for the forecasts to be useful, the below-mentioned assumptions must stand appropriate to the business. Assumptions can be made keeping in mind the past performance, customer and supplier correspondence, industry publications, etc., and usually include:

-Timing and quantum of price increases – both the organization’s and its suppliers’

-Seasonality impacts

-Provision for general cost increases (CPI)

-Sales growth estimates

-Provision for internal salary increases

Listing the assumptions within the cash flow forecasts helps add credibility and also serves as a reminder when actually assessing the performance against the forecast.

Forecast the future

Companies usually prepare weekly cash flow statements to get an insight into short-term liquidity, but it is essential to look to the future in order to determine whether the organization will survive within the existing funds or will require external help. This way, the company can find resources and put them in place, in advance, before it actually needs them. Being able to feed on the outcome of a rolling re-forecasting procedure is anticipated to enhance the accuracy of long-term cash flow forecasts.

The ideal situation is to prepare a model that combines both weekly and monthly forecasts. However, most cash flow solutions prepared are developed around a pre-defined planning and budgeting solution, which are usually restricted to a single time dimension (e.g., days, weeks, months). A better strategy exists and that’s to prepare and combine cash flow forecasts for weeks, months and even years. This makes it simple to determine various cash inflow and outflow situations such as how extending the store timings an extra hour every day can impact the organization’s monthly cash position.

Mix different approaches

While forecasting short-term cash flow begins with the organization’s cash receipts and payments from accounts receivable and payable ledgers, forecasting cash flow for a longer period of time requires the use of indirect methods, such as modeling several assumptions relating to income and expenditure line items in a profit and loss account forecast. And, to reap maximum benefits, it is best to interchange between the two methods, such as using varied time periods, etc.

Prepare anticipated level of details

Sales, among other important organizational factors, can be hard to predict. The graph can take any turn depending upon the demand and supply of your merchandise in the market. In order to forecast sales, the best place to start is to look at the sales made in the previous year(s) to identify the trends and sale patterns. You can thereafter, identify internal (increase/decrease in prices, etc.) and external (economic factors, etc.) factors which can impact the present period and make necessary amendments for future.

In addition to preparing sales estimates, you must also compile a list of other cash flow elements. This includes:

-Tax refund and GST rebates

-Additional equity contributions

 -Royalties or franchise / license fees

-Insurance proceeds

-Receipt of Government grants

-Cash receipt from asset divestment

Monitor Accuracy

Having determined the assumptions and models which can be handy and useful for long-term cash flow predictions, it is equally essential to test the model for credibility and accuracy. Monitoring variances between predictions and actual cash flow in the business can help unveil opportunities for improvements. After making necessary changes, their impact should be tested to ensure that they are valid.

Listing assumptions and measuring module accuracy are key to successfully forecast cash flow.


Kevin Hsu is a co-founder of Kepion Solution, driving innovations in areas of business intelligence and analysis for mid-size to global enterprise companies. With more than 10 years of industry experience in developing and delivering BI solutions for customers internationally, Kevin is a key stakeholder in the success and growth of Kepion.

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