The first thing you need to do is establish the business objective that your cash flow forecast is aiming to support.

While a general cash flow forecast can be useful a more targeted approach is often far more effective and can focus on:

• Short tern liquidity planning
• Interest and debt reduction
• Liquidity risk management
• Growth planning

Your cash-flow forecast is determined by these objectives. For example, businesses looking to reduce debt can plan to shape cash flow to meet interest payments. They will not need, however, to look at short-term liquidity.

Once you’ve determined the business objective you hope to support with a cash flow forecast, the next thing to consider is how far into the future your forecast will look. This is then reflected in the quality accuracy and quality of the forecast.

Forecasts can be broken down into the following sets:

• Short-term forecasts
• Medium-term forecasts
• Long-period forecasts
• Mixed-term forecasts

Short-term forecasts tend to be more detailed, looking at things on a day-to-day basis across a period of time, say a month. Medium-term ones take a two-to-six-month timeline.

A Long-term forecast will look six to 12 months into the future. These are often used as the basis for looking at growth and investment purposes.

A mixed forecast makes use of all three methods. Usually, they are more granular in nature taking a weekly forecast for the first three months and tapering off to monthly for the rest of the period.

Overall cash-flow forecasting presents a valuable tool for assessing your business and your ability to make key business decisions.

To find out how we can help you with a cash-flow forecast, please contact us.