Financial Health: 5 Steps to an Accurate Cash Flow Projection

A cash flow forecast is the process of estimating the flow of cash in and out of your business over a designated period of time. Accurate cash flow forecasts allow companies to predict and avoid or prepare for negative cash flow as well as identifying areas where there is a surplus. There are four key methods of financial forecasting, each with their own purpose and accuracy. Before diving into which method of forecasting is best for your business, follow these five steps to ensure you have an accurate cash flow forecast:

How to Ensure an Accurate Cash Flow Forecast

Cash flow forecasting is not a “one shoe fits all” process. Every business, your included, has it’s own goals, industry, and roadblocks when it comes to forecasting. For example, seasonal businesses that experience high lows and quick highs requires a different approach than a business that maintains a steady cash flow throughout the year.

Here are five steps to help you create an accurate cash flow forecast:

#1. Determine the objective of your cash flow forecast

Before creating a cash flow forecast you need to establish the objective or goal behind your forecast. This allows you to create actionable business insights rather than having a forecast that does not provide the necessary information you need. Some common objectives include short-term liquidity planning, interest and debt reduction, covenant and key date visibility, growth planning, and liquidity risk management.

#2. Establish the period of time for forecasting

The time period is more important than just having the information to create your forecast, it actually will influence the method of cash flow forecasting that is best for your business. You will need to determine if you need a short-period forecast, medium-period forecast, long-period forecast, or mixed period forecasts. These periods start at looking two to four weeks into the future all the way to looking six to twelve months into the future.

#3. Choose your cash flow forecasting method

The two main methods of cash flow forecasting are indirect and direct. The primary difference between the two methods is that direct forecasting utilizes the actual flow data while indirect forecasting relies on projected balance sheets and income statements. Direct forecasting is more accurate than indirect, but tends to become unreliable when forecasting beyond 90 days.

#4. Source the data needed for your forecast

To ensure an accurate forecast, you want to pull the most accurate data from your business backend. Most of the cash flow data you will need is located in bank accounts, accounts payable, accounts receivable, or an accounting software you use. You will typically need your opening cash balance, cash inflows, and cash outflows for the forecasting period. 

#5. Double check your final forecast

After completing your cash flow forecast, look back at your numbers and double check that they are all accurate and none were skipped or mistyped in the process. Doing this after each step as well as after your final cash flow forecast will keep your forecasts accurate and allow you to make educated decisions for your business. If you need assistance creating a cash flow forecast for your business, reach out to ModVentures today.