Quick Reference Cashflow Forecasting
One tool that may be overlooked in financials is cashflow forecasting. To effectively manage the company funds, it is important to know your future cashflow position.
What is Cashflow Forecasting? Cash flow forecasting is the process of predicting cashflow (perhaps on a period-by-period basis) for managing liquidity needs and for investment/spending control. An accurate forecast provides the investment decision-maker with information necessary for making true investment decisions.
(Wikipedia: In accounting, liquidity (or accounting liquidity) is a measure of the ability of a debtor to pay his debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities.)
A good cashflow forecast should answer these questions:
- How much cash is available?
- When will it become available?
- How long will it be available?
Building a good cashflow forecasting model, usually, takes time and effort. Are the benefits greater than the costs? To understand this, it is important to understand the benefits of cashflow forecasting.
- Improved investment earnings
- Ensured liquidity
- Identification of cashflow shortfalls