Cash flow forecast
What is a cash flow forecast
A cash flow forecast, also known as a cash flow projection, is an estimation of a company's future cash inflows and outflows over a designated period, commonly a 12-month span. This tool is vital for understanding a company's financial health, ensuring there's sufficient cash on hand, and planning for future financial needs. By detailing anticipated revenues, expenditures, capital spending, and financing activities, a cash flow forecast can highlight potential cash deficits or excesses and guide investment or borrowing decisions.
Why would a lender request this document
Lenders, when evaluating a loan application, often seek a cash flow forecast to gain deeper insights into a borrower's financial stability. A few reasons why this document is invaluable to them include:
- Financial health insight: The forecast offers a window into the borrower's potential to generate cash, playing a crucial role in determining their repayment capacity.
- Liquidity evaluation: It aids lenders in gauging the borrower's liquidity and cash management proficiency. A robust liquidity position suggests that the borrower can handle unforeseen expenses or revenue fluctuations without jeopardizing loan repayments.
- Future growth assessment: The projection can also shed light on the borrower's prospective growth, influencing their long-term repayment capability and general credit standing.
In essence, a cash flow forecast assists lenders in discerning the borrower's loan repayment abilities, liquidity status, and potential for future growth. These insights play a pivotal role in the loan approval process.
How to prepare a cash flow forecast
Both Excel and Google Sheets offer excellent cash flow forecast templates that are relatively easy to use. These templates provide a convenient way to track and project cash inflows and outflows, helping businesses effectively manage their finances.
- Develop a framework: Begin with a template or spreadsheet that will serve as a foundation for compiling the necessary data.
- Determine the timeframe: Choose the projection period, ideally looking at a 12-month period to capture monthly variations.
- Forecast cash inflows: Estimate expected revenues from sources like sales, services, or investments.
- Forecast cash outflows: Anticipate the expenses like day-to-day operational costs, capital outlays, and loan settlements.
- Calculate net cash flow: For each period, deduct the outflows from the inflows to ascertain the net cash flow.
- Establish cumulative cash balance: Accumulate the net cash flows to discern the overall cash reserve at the conclusion of the forecasted span.
When crafting a cash flow projection, it's imperative to base it on historical data and make grounded assumptions. As your business evolves and actual figures come to light, revisiting and fine-tuning your forecast becomes essential to maintain its relevance and accuracy.