Cash flow forecast

What is a Cash Flow Forecast?

It has been said that to govern means to foresee.

The Cash Flow Forecast is an essential tool for anticipating the surplus or future cash needs of a business.

It’s a key aspect of financial management to avoid a lack of liquidities or, conversely, to avoid having huge amounts of idle cash.

How to draw up a Cash Flow Forecast?

First of all, the historical accounts of year t, namely the balance sheet and the P & L accounts (Profit and Loss) must be available.

Then you have to set up forecast accounts (balance sheet + P & L) for year t + 1.

After that, you only have to go through five calculation steps:

1. Calculating the forecast operating cash flow

The estimated operating cash flow is calculated by adding to the forecasted net result (profit or loss) the undisbursed expenses and subtracting the non-cashed revenues.

Undisbursed expenses are depreciations, provisions and prepaid expenses. Non-cash income includes unrealized capital gains, reversals of depreciation, reversals of provisions and deferred income.

2. Calculating the forecasted change in working capital requirements

Receivables and inventories are locking in cash. This explains why their movements upwards or downwards have a negative or positive impact on cash flow.

This is also why a growing business (and hence rising turnover and receivables) requires additional working capital funding.

Commercial, fiscal and social debts represent a resource for the company. That is why their upward or downward movements will have a favourable or unfavourable impact on liquidity.

Some examples to illustrate:

The forecast change in the item “customer” (receivables at time t + 1 – receivables at time t)

If an increase in receivables is expected in t + 1 (for example, as a result of the expected increase in turnover), the change to be taken into account will have a negative impact on cash flow.

The forecast change in “inventories” (inventories at time t + 1 – stock at time t)

If “inventories” are assumed to increase in t + 1 (for example, more sales are planned, then more or more are bought), the variation to be taken into account will have a negative impact on cash flow.

The forecast change in “suppliers” (debts at time t + 1 – debts at time t)

If commercial debts are expected to decline (for example, suppliers require faster payment terms), their variation will have an unfavorable impact on the company’s liquidity.

The change in tax and social security debts (debts at time t + 1 – debts at time t)

If the forecasted tax and social security liabilities increase, their variation will have a positive influence on cash flow.

3. Taking into account investments and divestments

Investing in new assets, on own funds, will result in a decrease in cash. While the sale of assets (disinvestment) will increase cash.

4. Consider changes in capital, current accounts and changes in financial liabilities

The positive change in the company’s capital, the shareholders’ current accounts (on the liabilities side of the balance sheet) and the increase in financial debts will have a positive impact on cash flow.

5. Calculating the free Cash Flow Forecast

Free cash flow in t + 1 is obtained by adding the current liquidity at time t to the forecast cash flow at time t + 1.

If positive, cash in t + 1 will be in excess. If, on the other hand, the sum gives a negative amount, we will face a cash requirement in t + 1.


The Cash Flow Forecast is an important tool to manage properly the cash of any organisation or small business.

Whether to demonstrate its repayment capacity to its banker, to convince an investor or to make management decisions such as investing or hiring, the cash flow chart is a must.

The Cash Flow Forecast could be also useful to estimate the value of a start-up or an asset, thanks to the “discounted cash flows method”.

With this method, all cash flows are estimated and discounted by using cost of capital to calculate their present value.

It’s Your Turn

What do you think? Do you recognize the practical explanation about the Cash Flow Forecast or do you have more additions? What are your success factors for the good cash flow forecast set up?

(This article is also published on ToolsHero )

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