Cash Flow Forecasting

Nov 30, 2020

Cash Flow

Any beach lover can tell you the ebb and flow of tides can be extreme.  The world’s most extreme can be found in North America.  In the Bay of Fundy in Canada, the tide flow increases up to 53 feet.  Experts estimate that the flow of water in and out of the bay is over 175 billion tons of seawater.  That is more than all of the world’s freshwater rivers, combined! During low tide all sorts of creatures, geological structures, and lost treasures can be found.  The shoreline is stripped of its cloak and the hidden world is visible.  Sometimes you even see more than you expected.  Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.”

Sustaining Life of a Business

Cash flow analysis and forecasting is important to sustaining the life of a business.  The analysis of how cash flows in and out of a business over a specific time provides a well-rounded view of the health of the business and helps the business to make plans for the future.  Once the cash flow analysis is complete, a forecast can be created.  The forecast provides a view of a company’s financial position based on anticipated payments and receivables.  This forecast ensures that a business has the necessary cash to meet its obligations, avoid funding issues, helps to manage and plan liquidity, and improves working capital management.

Direct and Indirect

There are two types of forecasting for cash flow; direct and indirect.  Direct forecasting focuses on the short term and shows the cash required to fund the working capital.  It’s developed from analysis of the upcoming debits and credits.   Indirect forecasting, conversely, focuses on the long term.  It shows the cash needed to fund growth strategies and capital projects over the long term.  This is constructed through scenario-based planning.

Cash Flow Forecasting Takes Time

The more time you invest into forecasting, the better you will understand the patterns making up the ebb and flow of your company.  A hard look at your budgets vs actuals helps you understand the reasons between the differences.  The more you investigate this aspect, the better you will get at identifying patterns and planning for them.  Cash flow forecasting involves all departments of your business.  Because all departments deal with the inflow and outflow of cash, they all have a role in accurately predicting the overall cash flow.  With strong forecasting habits, and effective and efficient technology you can develop a cash flow forecast to support your business endeavors.

Just keep swimming

Riding the waves of a year, especially one like 2020, is a challenge.  But when you understand the rhythm of the tides you can ride the waves more securely.  However, if you should catch yourself naked when the tide goes out, turn to another philosopher of life, Dory from Finding Nemo, and “just keep swimming.”