3-Way Cash Flow Forecasting
It is common for a business to be making continuous profits on a monthly basis yet still have no money in the bank. Cash flow forecasting allows you to see where your money is going each month and allows you to plan and make more informed decisions for your business.
Cash flow forecasting is a process for determining the amount of cash that will be generated or expanded by a business over a specific period of time, usually on a monthly or quarterly basis.
Cash flow forecasting aims to predict the amount of cash that will be available to a business in the future, based on its expected income and expenses. It helps businesses plan and manage their finances by identifying potential cash shortfalls or surpluses and making informed decisions about investments, expenses, and financing.
Benefits of cash flow forecasting include:
- Identify potential cash shortages and take actions to prevent them.
- Make informed decisions about investments and financial commitments.
- Manage working capital more efficiently.
- Improve communication with investors and lenders.
- Increase overall financial stability and reduce financial risk.
What is 3-Way Cash Flow Forecasting?
A 3-Way cash flow forecast combines your profit and loss budget, ongoing asset and liability position and cash coming in and going out. It is common for banks and other lenders to require these from businesses before granting them finance but, it is fantastic tool to show you where your cash lies month to month.
Your cash flow forecast needs to be updated to record the actual results each month to accurately reflect your cash position on an ongoing basis. Your cash flow forecast can also allow you to see what impact growth or equipment investment will have on your bank balance using what-if analysis.
What is 3-Way Cash Flow Forecasting?
A 3-Way cash flow forecast combines your profit and loss budget, ongoing asset and liability position and cash coming in and going out. It is common for banks and other lenders to require these from businesses before granting them finance but, it is fantastic tool to show you where your cash lies month to month.
Your cash flow forecast needs to be updated to record the actual results each month to accurately reflect your cash position on an ongoing basis. Your cash flow forecast can also allow you to see what impact growth or equipment investment will have on your bank balance using what-if analysis.
PROFIT AND LOSS BUDGET
A profit and loss budget details a business’s expected revenues, expenses, and profits. It is used o assess the financial performance of the business and can identify potential areas of improvement or concern. It is one of the most important reports for businesses as it shows profitability of the business.
Profit and loss budgets need to be comprehensive and detail all income and costs for the coming year, reporting what is expected profits (or loss) the business can generate. How ever, a profit and loss budget will not reveal the impact of the profit on your cash reserves.
ASSET AND LIABILITY POSITION
The asset & liability position of a business is referred to as the balance sheet. A Balance Sheet projection is an estimate of a business’s asset & liability position in the future, based on its current expected capital expenditure, equity withdrawals and finance arrangements.
When paired with the profit and loss budget, it will show the financial position of your business but not how much money will be in the bank.
CASH FLOW FORECAST
A cash flow forecast shows the cash in and out of your business and is an essential tool for businesses as it shows if the business has enough cash to run the day-to-day operations and if there are sufficient funds to grow and expand your business. It will allow you to see if there are months when cash shortages can be expected and this will give you the opportunity to plan for the lean months.
A 3-Way forecast should at least cover a 12 month period and is an integral part of your business planning. It will allow you to build a solid understanding of the movement of cash in your business and compare actuals to budget.
For more information about 3-Way forecasting, contact one of our specialists.