Types of Cash Flow Forecasts

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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