Cash flow forecasting: Essential management for your company's financial health
The cash flow forecast is an essential tool for any company wishing to anticipate and control its financial flows. It is a strategic document that enables the company to evaluate cash inflows and outflows over a defined period. By anticipating future cash inflows and outflows, managers can make informed decisions and avoid costly financial tensions.
Cash flow management is fundamental to a company's success. Poor anticipation can lead to major problems such as late payments, bank overdrafts or lost investment opportunities. On the contrary, proactive cash management strengthens a company's resilience and supports its short- and long-term growth.
In this article, we offer you a complete guide to cash flow forecasting, from its definition to its implementation, including tools and best practices for optimizing it.
What is a cash flow forecast?
A cash flow forecast is a detailed financial table used to anticipate a company's cash flows over a given period. It is based on forecasts of cash receipts (sales, capital injections, subsidies) and cash disbursements (salaries, expenses, supplier payments, investments).
The main objective of this document is to provide a clear and precise view of the financial resources available at a given moment. By identifying periods when cash flow may be insufficient, managers can anticipate financing requirements and adjust their strategy accordingly.
A cash flow forecast is not just about avoiding liquidity crises. It is also a steering tool for optimizing expenditure, identifying room for maneuver and securing relations with investors or financial partners.
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What you'll find :
- Concrete advice to anticipate your cash flow.
- Practical tips for securing your liquidity.
- Monitoring tools and best financial practices.
Why prepare a cash flow forecast?
A cash flow forecast offers a host of advantages that justify its adoption by all companies, whatever their sector of activity or size.
Anticipating financial needs
One of the main benefits of cash flow forecasting is the ability to identify in advance the periods when external financing may be required. By anticipating these needs, a company can prepare its negotiations with banks or investors, thus avoiding emergency situations where financing conditions are often less favorable.
Avoiding cash flow pressures
A lack of liquidity can have serious consequences, such as theinability to pay suppliers or employees, or penalties for late payment. Forecasting helps prevent such problems by adjusting incoming and outgoing flows before they become critical.
Strategic decision-making
With a clear view of future cash flow, managers can make informed decisions about investments, hiring or marketing expenditure. They can also identify favorable periods for launching new projects, or negotiate more advantageous payment terms with their partners.
The difference between cash flow forecasts and budget forecasts
Cash flow forecasts and budget forecasts are often confused, but they serve different purposes.
- Cash flow forecasts focus on actual financial flows: actual cash receipts and disbursements, as shown on bank statements.
- The budget forecast, on the other hand, is a global projection that includes accounting income and expenses, even if they do not yet have a direct impact on cash flow(depreciation, provisions, etc.).
The two tools complement each other: cash flow forecasts provide an immediate, operational vision, while budget forecasts enable you to plan for the longer term by integrating strategic objectives.
How do I make a cash flow forecast?
Creating an effective cash flow forecast requires a methodical approach and the use ofappropriate tools. Here are the key steps.
1. Financial data collection
The first step is to gather all the information needed to produce a reliable forecast. This includes:
- Anticipated receipts: sales, capital contributions, customer reimbursements, subsidies.
- Planned disbursements: salaries, rent, social security and tax charges, loan repayments, purchases of raw materials.
To guarantee the reliability of your forecast, it's essential to use recent, accurate data, taken from bank statements, invoices or current contracts.
2. Choice of method
Two main methods can be used to draw up a forecast:
- The direct method, based on historical cash flows. It is ideal for companies with a solid financial track record.
- The indirect method, based on sales and expenditure projections. It is often used by start-ups or fast-growing companies.
3. Regular updates
A cash flow forecast is not static: it needs to be updated regularly to reflect changes in the company's activity. In general, it is advisable to update it :
- Every week in the event of financial tensions or high flow variability.
- On a monthly basis, to monitor theprogress of short-term objectives.
- Quarterly or annually to adjust overall strategy.
How do you calculate cash flow forecasts?
To draw up an accurate forecast, it is necessary to detail cash receipts and disbursements over a given period, usually by month.
Receipts
They include :
- Income from sales of products or services.
- Capital contributions(investors, shareholders).
- Public grants and subsidies.
Disbursements
They include :
- Salaries and payroll taxes.
- Supplier payments(purchases of raw materials, services).
- Loan repayments and other debts.
- Exceptional expenses(investments, renovations).
Once this data has been collected, it is possible to calculate key indicators such as :
- The net cash balance, which is the difference between cash inflows and outflows.
- Working capital requirement (WCR), which measures the resources needed to finance the operating cycle.
- The cash runway, which indicates the number of months before available liquidity is exhausted.
The unexpected: how to anticipate it?
Even with a rigorous cash flow forecast, unforeseen circumstances can arise. Here are a few tips to help you manage them:
- Build in a safety margin: Set aside a cash reserve to cover unforeseen events such as late payments or increases in charges.
- Regularly analyze variances: Compare forecasts with actual flows to identify anomalies and adjust your assumptions.
- Prepare alternative scenarios: Draw up several versions of your forecast, incorporating optimistic, realistic and pessimistic assumptions.
Practical example of a cash flow forecast
To better visualize a cash flow forecast, imagine a small business forecasting cash flows for the next three months.
- Month 1: Inflows of €50,000, outflows of €40,000. Balance: +10,000 €.
- Month 2: Inflows of €45,000, outflows of €50,000. Balance: €5,000.
- Month 3: Inflows of €60,000, outflows of €55,000. Balance: +5,000 €.
When these results are added up, the company may anticipate a positive cash position, but notice a temporary squeeze in the second month, prompting it to seek bridging finance or postpone certain expenditure.
Tools to automate cash management
Today, there are a number of software tools available toautomate the creation and monitoring of cash flow forecasts. These tools offer advanced features such as :
- Synchronization with bank accounts for real-time monitoring.
- The generation of clear, visual dashboards.
- Automatic identification of anomalies or deviations.
Popular solutions include QuickBooks, Agicap, Spendesk and Regate.
Why outsource cash management?
Outsourcing this strategic function to an expert like Iter Advisors offers several advantages:
- Saves time: in-house teams can concentrate on their core business.
- Specialized expertise: financial management experts provide customized solutions and high-performance tools.
- Risk reduction: Thanks to rigorous analysis, unforeseen events can be anticipated and better managed.