Basic cash-flow forecasting

From a management acconting point of view cash-flow is a matter of budgeting and monitoring of the cash inflows and outflows.  Accountants will not only be concerned with the preparation of a yearly budget, but its quarterly, monthly, or even weekly breakdown of the cash flow statement.

Cash Flow Forecasting

It is good practice to continuously assess any deviations from the budgeted figures and re-formulate the budgets accordingly. Deviations may have two sources:

  1. Since cash flow statements are calculated from sales, purchases, production and costs budgets, any deviation in these ones will generate differences between the real and budgeted amounts in the cash flow statement.
  2. As the cash inflows (receipts) and outflows (payments) are a lagged realisation of real World operations (sales and purchases, payroll, taxation…), any difference in the scheduled payment or receipt terms against the actual ones will provoke such deviations.

Deviation(cash flow) = f(Deviation(amounts), Deviation(avg.days))

While the difference in days might be a matter of considering historical payment/receipt actual days and the deviations against theoretical terms, closely monitoring of the administrative procedures might help (i.e. invoice on time, stablish a collection procedure, automate processes as much as you can…). It would be a good idea to put a commercial risk management policy in place, too; this would help assessing the likelihood of a customer delaying payment or, in the worst case, defaulting (check this basic tool, for instance).

However, if the budgeting procedure is a top-down one (from sales, to purchasing and production, investment…) the first source of deviation will be the sales budget, the second being your purchasing.

So then, to improve your cash flow forecast you should actually better improve your sales and purchasing forecasts.