Cash Flow Forecast

Written by Patricia Tunstall
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Financial statements report on a company's performance, in other words, the past. A budget presents plans for the future--where the business manager wants the company to go, and how to get there. Budgeted cash flow is a cash flow forecast that depends on comparisons of the assets and liabilities from the preceding year to those of the coming year.

A knowledgeable business manager will control inventory and accounts receivable, both of which adversely affect cash flow. The budget for the coming year should provide a guide as to the limits that must be placed on these two drains on business cash flow. The cash flow forecast will provide insight about whether control of inventory and accounts receivable must be tightened.

Large Companies and Budgets

In a company so large it has divisions, the already complex nature of cash flow increases. Several financial officers are involved in examining the budget and coming up with a cash flow forecast for the entire company. There must be enough cash flow to take care of the capital expenditures the officers think are necessary.

If cash flow is inadequate, the company would have to decide how to raise the necessary capital. One possibility is to go into debt, that is, borrow money. Another is to obtain money from equity sources, namely, owners. The cash flow forecast enables the officers to see how much capital must be raised.


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