Cash flow: how to determine your future liquidity level


    Liquidity is key for all companies and cash flow plays an integral role – and that goes for your business too. Cash flow forecasting consists of estimating a company’s future financial position and ensuring that it has the necessary funds to meet future obligations and best manage working capital. Why is cash flow forecasting important for your company? It is prudent for companies to draw up cash flow forecasting to better understand the numbers that will inform decisions about their activities. Cash flow forecasting helps companies to estimate the amount of money coming in and going out of the business during a specific period. This helps your company plan and prepare for potential future scenarios, while also giving a clear picture of its financial position.

    Cash flow: what a forecast looks like

    A typical cash flow forecast is broken down into three key parts:

    • initial cash balance: this is generally the total amount a company expects to have at the start of each month;
    • cash inflows: these are the sources of cash that come into the company each month, including cash sales;
    • cash outflows: these are the expenses that the company must meet during the period, for example, salaries, rent and utilities.

    You also need to consider how far into the future your forecast will go. Usually, this involves a compromise between the availability of the information and the length of the forecasts: the further into the future, the less detailed and accurate the forecast is likely to be.

    Therefore, we can have forecasts that are:

    • short term: from two to four weeks. These contain a daily breakdown of cash payments and bills.
    • medium term: these look from two to six months ahead and are very useful for reducing interest and debt and managing liquidity risk.
    • long term: these look from six to twelve months ahead and usually form the starting point for annual budgeting.
    • mixed period: these employ a mix of the three periods above and are often used to manage liquidity risk.

    Cash flow: the benefits of forecasting

    Cash flow is a very significant company KPI and a key element in financial planning and management. Learning to weigh up the benefits and drawbacks of cash flow forecasting can help companies take decisions by carefully assessing all the options.
    Cash flow forecasting can offer multiple benefits to your company. Here are the main ones.

    Predict potential issues

    Cash flow forecasting gives companies the time they need to change course and avoid problems, such as shortages or surpluses.

    Anticipate liquidity issues and plan for them

    Cash flow forecasting helps companies identify cash deficits before they impact their activities, allowing management to organise alternative sources of finance or mitigate the problem by reducing operating costs.

    Reduce debt and reliance on loans

    A solid understanding of the company’s cash flow situation allows management to ascertain whether the company has sufficient funds to cover its expenses without relying on debts or loans.

    Why companies employ AI systems for cash flow forecasting

    Cash flow forecasting entails a great deal more than simply understanding how much money is in the company bank account. A significant number of resources go into calculating cash flow, including an objective and subjective analysis of the cash flow statement. This is why an increasing number of companies rely on artificial intelligence systems for cash flow forecasting – systems that make assessments simple and fast.

    The ideal cash flow forecasting system should be able to assess future requirements in the short term. It should also be able to automatically analyse the best financial options for maintaining high levels of funding in the short term.

    A fully automated system collects data and presents them for managers’ assessment in a simple and easy-to-manipulate form, benefiting the financial sector by making cash flow forecasting more accessible.