Forecasting Cash Flow And How It Can Effect Your Company

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A change in financial position or cash flow simply means the difference between the net receipts and net payments over a certain period of time.  Receipts are the income from recent sales, plus the sale of other assets or proceeds of financing and so on.  Payroll, dividends, debt services and so on, come under payments.  A company’s financial health can be deduced through analysing the cash flow.  As long as the receipts exceed payments, we can say that the company is solvent.

Forecasting cash flow gives you a good indication of expected profit at the end of a particular time period.  For example, you can calculate how much cash you will have after 6 months, or 1 year or more years.


In a wider sense, cash flow is divided into three activities; operating activities, investing activities and financing activities.  The receipts included in operating activities are the sale of goods or services, interest revenue and dividend revenue. The payments are inventory purchase, payroll, taxes, interest expense and others (utilities, rent). In investing activities, cash receipts include the sale of assets, business segments, and investments in equity securities. Purchases of assets, equities, and loans to other entities are included in payments in this section. The third activity, financing activities, also have receipts and payments. Own stock issuance and borrowing (bonds, mortgage and so on) are receipts and dividend to stockholders; repaying principal amounts borrowed are the payments.


In regards to forecasting cash flow, it can be illustrated with a simple example. A short-term cash flow prediction (weeks) can be done in the following way:

  • The previous week’s cash balance will be the beginning cash balance of the new week.
  • The ending cash balance will be equal to the beginning cash balance plus receipts minus payments.


Forecasting cash flow is conducted to keep you informed on how strong your company will be financially, at the end of a particular period.  Normally it will be positive, provided the data is correct and the receipts and payments are realised as predicted. Moreover, cash flow prediction is made to make sure there are no defects in the running of the company and to rectify any problems, if there are any. There is always something unexpected happening in the world. Such things can also topple your calculations.  Bogus entries in the forecast can affect your success.  It is actually a mode of valuation of the status of one’s business or company.  It allows you to make timely changes to tide over the impending problems and also prepares you to make corrections and adjustments accordingly.

Making an accurate prediction of cash flow in recent times has proved to be very difficult in recent times.  Changes in the economy have seriously affected cash flow, risks, and financing, and these are the basic factors you need to pay close attention to when valuing your business. A statement of cash flow will usually form part of the financial statement included in the annual reports.  Companies with high accounting profits generally have high cash flow.  But it may not be always true, because net cash flow differs from net income. So, before making great changes based on cash flow projections, you must make a thorough study of all related sectors.

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Source by Harry Worthington

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