How are cash flow forecasts different from cash flow statements?

Estimating cash flow in and out of business over a set period is known as cash flow forecasting. Forecasts are particularly critical for growth since they lead strategic financial and investment decisions, changing the company’s future and increasing profits. Cash flow forecasting prepares a company to operate without financial restrictions and provides a roadmap for achieving short-term and long-term business goals.

Why is cash flow forecast important?

Cash flow forecasting is essential for the following purposes:

• Organizing surplus cash:
  Cash flow forecasting solution can help cash managers anticipate potential surpluses and correctly deploy excess funds. This enables firms to expand or utilize surplus funds to gain a competitive advantage.
• Optimizing the working capital:
  Optimizing working capital is improved by using a cash flow forecasting system. A company with timely access to working capital has various advantages, like
  Tracking cash inflows and outflows easily
  • Avoiding overborrowing
  • Minimizing the time-consuming manual data transfer from one resource to another
  • Making confident decisions on investment/debt
  • Making use of idle cash
• Calculating payables and receivables:
  Cash forecasting improves A/R and A/P forecasts by:
  • Conducting historical analysis and regression analysis to discover historical trends
  • Supporting a large number of customer and invoice-level characteristics to predict payment dates for specific customers
  • Using appropriate models and algorithms for A/R, A/P, and other cash flow, use suitable models and algorithms
• Reducing risk by hedging:
  Forecasting can also detect and predict foreign exchange concerns, allowing treasury to plan and implement suitable hedging strategies to mitigate risk.
  It also reduces treasury risks by detecting errors or fraud in transactions or payments through automatic reconciliation. This allows for better cash management and the avoidance of unnecessary debt. Treasurers can also recommend improved financial plans for their firm by locating superior investment portfolios.
• Making funding and investment decisions:
  Investments and funding can be easily managed with accurate estimates to ensure short-term and long-term objectives are achievable.

It’s a type of financial statement that shows how much money a company has in cash and cash equivalents. It’s a crucial report that shows how a company’s cash flow has changed over a set period. Such data on a firm’s cash position can help the company or a financial analyst plan for the short or long term and determine the optimal cash and working capital required.

Why is the cash flow statement important?

A cash flow statement is essential for

• Short and long term planning:
  The cash flow statement is an essential tool for firm management to utilize for short-term and long-term cash planning. Every company entity must have a sufficient amount of liquid funds to meet its numerous obligations to pay them as and when they arise. As a result, the cash flow statement assists the financial manager in estimating cash flow soon based on historical data on cash inflows and outflows. The company’s growth is based on long-term planning. As a result, it identifies critical improvements that must make to improve a company’s financial position and assists management in prioritizing essential tasks of business.
• Analyzing working capital:
  Working capital is a component of cash flow from operations that can impact a company’s cash flow. As a result, investors should be aware of the company’s working capital flow. Treasury can track cash flows and measure financial health to make confident business decisions with accurate and timely cash flow visibility. Businesses may better manage their working capital with high visibility into cash flows. They can perform the following with more financial visibility:
  • Meet short-term financial demands
  • Pay off your debts
  • Expand the company
  • Encourage planned capital expenditures
• Identifying the optimal cash balance:
  The cash flow statement is essential because it helps the company determine the optimal cash balance level. The corporation must identify the optimal amount of cash balance to assess whether the company’s funds are idle, whether there is a cash shortfall, or if the funds are excessive. The company’s management can make informed decisions after a clear picture of the current cash situation.
• Releasing the cash planning results:
  Another feature of the cash flow statement is that it helps enterprises determine whether their cash planning was effective since actual results can be compared to the predicted statement of the cash flow statement or the cash budget. The results will then help the organization in taking the appropriate actions. As a result, it assists the company in comparing past cash budgets with current budgets to determine what the company’s cash requirements will be in the future.

A cash flow statement depicts your company’s cash flow. With a positive cash flow, more money comes in than goes out. Cash flows can be improved by:

• Managing working capital 
• Preparing a cash flow forecast to predict future income and expenses

A cash flow statement is essential to cash flow forecasting since it is the tool for reporting cash flow. There are several reasons for creating a cash flow forecast and statement.

• Forecasting incomes or sales
• Calculating cash inflows
• Estimating cash outflows and expenses
• Compiling the estimates into your cash flow forecast
• Comparing projected cash flows to the actual cash flows

Comparing cash coming in with cash going out over a while is all it takes to calculate cash flow (for example, the past three months). 

Net cash flow= Cash received – Cash spent

Suppose  Company ABC has a £150,000 net cash flow from operations and a £60,000 net cash flow from financing activities.  Company ABC, on the other hand, lost money on investments, resulting in a -£80,000 net cash flow from investing activities. How do you figure out Company ABC’s net cash flow?

150,000 + 60,000 – 80,000 = 130,000 

This indicates that Company ABC’s net cash flow for the specified time period is £130,000, indicating that the company is relatively healthy and should have sufficient funds to invest in new goods or pay off debts.

How does cash flow forecasting software help manage cash flow better?

Cash flow forecasting solution helps treasury eliminate time-consuming manual processes, minimize errors and provide a single source of truth for easy and continuous data access. It provides the following benefits:

• High granular visibility: Timely data access and granular visibility are the results of centralized cash forecasting and automated data collecting. AI cash flow forecasting software is used to improve forecast accuracy.
• Modeling with accuracy: External elements like company cycles, seasonal trends, varying payment durations, and discounts/rebates can all be included in with AI cash flow forecasting to get a more accurate A/R and A/P forecast.
• Identifying variance drivers: Treasurers can identify sources of variance and make changes to produce more accurate cash forecasts with improved accuracy and frequency of variance analysis.
• Improved analysis of automated reporting: Improved reporting enhances the organization’s credibility and aids in developing and improving relationships with external stakeholders, investors, and the board of directors.
• Gathers customer-centric variables: Customer-specific variables can be simply recorded to detect customer payment behavior patterns. Treasurers can keep track of complex cash flow categories like A/R and A/P with ease.

Schedule a demo to spot the main differences between the cash flow forecast and cash flow statement.