It needs to be determined how far into the future forecasts will look. It is the first decision that needs to be made when setting up a cash flow forecast. Forecasts are more detailed the shorter they are. If the forecasts are much longer then it is less detailed.
The types of cash flow forecasts are;
- Short term
- Medium term
- Long term
- Mixed period
• Short term forecasts
Daily cash needs of a business are managed by short term forecasts. They generally 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.
• Medium term forecasts
Generally involves a 13 week period as it provides quarterly views. Can be extremely useful from a liquidity planning perspective.
• Long term forecasts
Long 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.
• Mixed period forecasts
Here, forecasts involve a combination of time periods. For example, a forecast spanning six weeks in total could contain two weeks of a daily cash flows and four weeks of weekly cash flows. This approach ensures detailed visibility where it matters most. An example of a mixed period cash forecast is shown below. This example covers a period of four months where cash flows are captured weekly in the first two months and monthly thereafter.
In most companies forecasts are collected on a weekly or monthly basis from business units. Forecasts can either be rolling or fixed term. A rolling cash flow forecast extends with each new submission and a fixed term forecast counts down to an end point such as quarter or year-end.
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