If a business owner wants to forecast the cash flow of his company, the process includes creating a comprehensive list of when his company will receive or spend cash in the future. This information is essential for him to make investment and fundraising decisions. Cash flow is vital for every business because no matter how profitable the company is, it still needs cash to ensure smooth operation. Forecasting cash flow is a tough task if the company has not maintained proper accounting records. If you, as a business owner, find it hard to complete all accounting-related tasks on your own, do not hesitate to seek help from an accounting firm in Johor Bahru.
Business owners may do the forecast of cash flow in two different parts, which are near-term cash flows and medium-term cash flows. Typically, the forecast for near-term cash flows covers a period which lasts for a month, and the cash flows are highly predictable. On the other hand, to estimate medium-term cash flows, business owners need to pay attention to the revenues that they have not earned as well as the supplier invoices that they have not received (Also see Introduction to Accrued Revenue). The estimation of the near-term cash flow can be rather precise, whereas the forecast of the medium-term cash flow will result in more insubstantial outcomes after one month has passed. Also, business owners may forecast the company’s long-term cash flow, which is a modification of its budget. However, the usefulness of this document is not so significant. Once the forecast of the medium-term cash flow has replaced the short-term cash flow forecast, the accuracy of the forecast will decrease immediately as the information used to generate medium-term forecast is less reliable.
To forecast the short-term cash flow, business owners should use a detailed accumulation of information from various sources in their companies. The information comes from the company’s payroll records (Also see Introduction to Payroll Accounting), accounts payable, accounts receivable, and other important sources such as the chief financial officer (CFO), treasurer and the corporate secretary.
The forecast for medium-term cash flow starts after the short-term forecast has ended and extends till the time where the business owners need the forecast for them to develop funding and investment strategies. Usually, this indicates that the medium-term forecast starts from one month onwards.
Most of the parts that make up the forecast of the medium-term cash flows are formulas, instead of the specific data inputs that the business owners use in the short-term forecast. As an instance, if a sales manager needs to predict the revenue figures for every forecasting period, the model may include the information below:
Cash received from the client
The manager may include a standard time lag between the date of issuing the invoice and the date of receiving the payment in the prediction (Also see How Can You Collect Payments for Overdue Invoices?).
Cash paid for payroll
The manager may use sales activity to predict the difference in production headcount, and he may use the headcount to derive payroll payments.
Cash paid for the items that are related to cost of goods sold
The manager can predict the cost of goods sold (Also see Should You Include Cost of Goods Sold (COGS) as Expenses?) as a percentage of sales, and he needs to include a time lag according to the supplier payment terms on average.