What is Cash Flow Forecasting?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 April 2020
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Cash flow forecasting is a strategy that involves predicting the influx of cash into a business, with attention to the amount of cash that is likely to be received in a given period of time. Accurately predicting or forecasting this influx of cash makes it possible for the business to schedule payments to their suppliers and other vendors, as well as meet internal expenses, like salaries and wages. Without an accurate cash flow forecasting, a business will find it very difficult to remain in operation for very long.

When engaging in cash flow forecasting, it is important to consider every source of revenue that is open to the business. The most common has to do with the anticipated receipts that relate to the accounts receivable portion of the accounting records. For most businesses, this means accurately determining how long it will be before customers remit payments for invoices issued by the business. By having an accurate projection of what percentage of the client base will pay invoices within thirty, sixty, or ninety days, the business can then structure their own disbursements to suppliers. If the process is efficiently crafted, this will allow for the payment of accounts payable items to be scheduled in a fashion that does not place the company in an awkward financial position where it consistently incurs late charges and fees from its vendors.

Along with cash received from the payment of invoices, many businesses also anticipate some amount of cash flow from other sources. This can include dividends from investments made by the company, or income that is generated by a subsidiary and forwarded to the parent organization. In order for cash flow forecasting to be accurate, all possible types of income must be accounted for. Failure to do so can make it much more difficult to structure a properly functioning budget, and could lead to the assessment of late fees on various payable items that could have been avoided otherwise.

When engaging in cash flow forecasting, it is important to also allow for the fact that some of the invoices issued by the company may ultimately be uncollectable. Sometimes referred to as an allowance for bad debt, this figure is normally identified as part of the receivables, but is not taken into consideration when arranging the payables for handling the orderly payment of the company’s debt obligations. This means that while cash flow forecasting is primarily focused on identifying when and how much cash will flow into the company during a given period, it also means allowing for a percentage of outstanding invoices to remain uncollected.


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