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Cash Flow Projection

Cash Flow Projection


Cash Flow Projection- The Lifeline of Business

Cash Flow Projection – The Lifeline of Business

Cash flow projection or cash flow forecast is an integral part of business management as well as financial planning. In this regard the future cash needs of the business are anticipated to meet the future liquidity needs of the business. So, why is this important in the first place? If a business is running out of cash and it becomes insolvent, it means they do not see a crisis of cash arising. In this regard the management cannot pin point to the fact that they did not see such a situation on the rise. This is all the more important in case of small as well as medium based enterprises. In relative terms planning will be simpler where the anticipated inflow of cash is estimated, as well as the outgoing cash flow is accounted for, so as to manage the exceed the cash flow coming in, at any point of time. The key point to be understood is that the cash is the life line of any business and entrepreneurs need to understand the fact that cash is the king of business and on all counts they must be good at managing the cash flow.

Uses of cash flow forecast

Some of the prime utilities of a cash flow projection or forecast is it identifies the early shortfall of cash in the business. So in a way, this tends to be a warning system of the business as well. In fact for a cash flow process this happens to be the most important thing. There are some fixed expenses for the business irrespective of the nature of cash flow. An example would drive home this point on a better level. For example, a business needs to pay the suppliers as well as the employees. If the suppliers are not paid on time they will stop the supply of goods and the employees are not paid they will be demotivated. The key factor in this regard is to spot the loopholes and make the payments as fast as possible. When a forecast is prepared it encourages the business to look at the debts and helps them to clear it off as fast as possible. In the midst of all this, it is not a problem for the retailers as most of their sales are done in cash. The cash flow forecast is an integral part of financial planning as well as the business management process, and one needs to look at it in a way as if they are preparing the business budgets. The external people like the banks may require a regular analysis of the cash budget of the company. On all counts, it is necessary that the management predicts the cash flow of the business to ensure that the business can survive on all counts. So in this regard, all anticipated dangers are taken care off.

Methods of cash flow forecast

So it is quite clear that to get the cash flow projection right the forecast of cash flow is very important as well. The direct method in this regard is to forecast the anticipated receipts as well as the disbursements of the cash. Receipts happen to be the accounts receivable from the various sources like sales, sales of other assets as well as the proceeds of the financing. On the other hand, disbursements mean the accounts payable which includes the accounts payable from various purchases like dividends as well as interest on purchases. One of the simplest methods is to prepare a spreadsheet, which anticipates all the cash flows of the business coming, as well as going out in the next 90 days. This in a way means that quantity as well as the timings of the receipts are accurate and hence avoids any catastrophe in the future with regards to accounts or cash itself. It needs to be understood that in a business it is rare that the cash receipts match the sales receipts because the customers rarely pay on time. This principle is all the more same when the cash forecasts are prepared on a spreadsheet, paper as well as any IT system.

Role of budgets in cash flow analysis

In reality a budget is the plan which the business strives to achieve which is depicted in numbers. It also specifies the objectives which the business strives to achieve out in the future. So on all counts; it is quite clear that it has a profound impact on cash flow projection. A business often prepares a cash flow forecast which is based on experience. Any sort of forecasts can be made as there might be disruption in the normal business process due to natural calamities as well. One thing is clear in this regard that any sort of cash forecasts are made on the past experience, whereas the budgets are prepared based on the future. With the evolution of technology in the last decade or so, preparing budgets manually has been a thing of the past. Lot of budget software’s have evolved in the market in a big way. One of the prime utilities of taking help of these software’s is that the forecast tends to be very accurate and the use of manual force is reduced to a drastic level as human beings are prone to commit mistakes a lot. One of the most popular software in cash flow analysis is the cash flow mojo.

Cash Flow Projection- The Lifeline of Business