Cash flow is the movement of money in and out of a business over a period of time.
Cash flow forecasting involves predicting the future flow of cash in and out of a business’ bank accounts. A cash flow forecast will usually be for a 12-month period. Forecasting cash inflows and outflows is important, especially for three types of business:
A cash flow forecast allows a business to plan for the future. It can therefore assist the business in making important decisions, such as:
Cash flow forecasting can also help a business to identify the risks of negative cash flow.
Creating a cash flow forecast for a new business can be difficult, as the business will have no previous figures to help it estimate its future cash inflows and outflows. This will require the entrepreneur to make some guesses. They will also need to monitor the business’ cash flow carefully to see whether their estimates were realistic, and make changes if not.
An established business can compare its actual cash flow with its cash flow forecast to monitor whether it is achieving its targets. It can then make changes if necessary.
Calculating cash flow involves finding or estimating figures for the following: