What Is A Cash Flow Forecast?: Financial Distress
What Is A Cash Flow Forecast?: Financial Distress
What Is A Cash Flow Forecast?: Financial Distress
But liquidity only tells us so much. A company might have lots of cash
because it is mortgaging its future growth potential by selling off its long-term
assets or taking on unsustainable levels of debt.
For a measure of the gross free cash flow generated by a firm, use unlevered
free cash flow. This is a company's cash flow before taking interest payments
into account and shows how much cash is available to the firm before taking
financial obligations into account. The difference between levered
and unlevered free cash flow shows if the business is overextended or
operating with a healthy amount of debt.
Broadly speaking, most cash forecasts will be structured as shown below. The image
below shows a cross section of 13 week cash flow forecast:
The cash flow items that make up the receipt and payment elements are unique to a
company’s forecasting needs. For example some companies would track high level
Accounts Payable / Accounts Receivable cash flows and other companies would
break the cash flows down to the level of individual customers and suppliers.
1. It ensures that the projected cash flows are starting from the actual cash flow
position.
2. Historic cash flow data provides a good basis for making future projections.
3. Capturing actual cash flows means that you can compare what was forecasted to
what was actually received allowing you to analyse the accuracy of the previous
forecasts.
• Short term forecasts are used to manage the day-to-day cash needs of a business.
Typically they look a couple of weeks into the future and contain a daily breakdown
of cash payments and receipts. A daily forecasting process would often include a
degree of automation capturing cash flows from bank accounts and ERP systems.
• Medium term forecasts such as rolling 13 week cash flow forecasts are extremely
useful from a liquidity planning perspective. The 13 week period is important as it
gives a quarterly view for each submission.
• Longer term forecasts such as a 12 month forecast is often the starting point for a
budgeting process and is an important tool for assessing the cash required for longer
term growth strategies and capital projects. The benefits of a long term forecast need
to be balanced against the dependability of forecasts over a long period of time.
Summary
In summary, cash flow forecasts are the main tool used by companies for forward
liquidity planning. Their format and duration vary depending on the exact nature of
each businesses requirements. Finance teams structure their cash forecasts
depending on what makes sense for them and what is important for the Treasurer,
CFO and ultimately the CEO. A robust and accurate cash flow forecasting process,
where accountability is built in, is an indicator of strong fiscal discipline in a company.