What is cash flow forecasting?

Cash flow forecasting is fundamentally the process of predicting future financial liquidity by estimating cash inflows and outflows. This involves analyzing various revenue sources and expenditures to anticipate how much cash a business will have available at any given point in the future. Accurate cash flow forecasting is crucial for effective financial management, as it enables businesses to ensure they have sufficient cash to meet their obligations, plan for investments, and manage unexpected expenses.

This process is different from simply assessing profitability, as it not only considers earnings but also the timing and amount of cash movements. It looks at specific cash entry and exit points rather than broader financial performance metrics. While it can inform budgeting and resource allocation, its primary purpose is to maintain a clear picture of a company’s liquidity situation over a set timeframe, allowing for better financial decision-making.