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4 Focus Areas for Forecasting Cash Flow

Cash is king and cash flow forecasting is important for your business. Use it to get insight into cash runway, which is how many months of cash you have remaining, as well answer key questions such as where you need to reduce overheads, when to invest, what sales increases you need.


Here are 4 focus areas for forecasting cash flow:


  1. Mid / Long Term Cash - Short term cash is important but also include mid/long term which is the 6-12 month horizon. This way you’ll be able to forward plan and get an understanding of the overall path of the business. Your immediate term cash forecast will likely be more detailed than the medium term, but making assumptions for unknown future events will allow you to still gain insight into the future trend.
  2. Variance Analysis - Conduct variance analysis by comparing forecasts to actuals. Maybe you forecasted that you would spend $100K on marketing, but only spent $70K, then you would have a negative variance of $30K. You can use this variance to reforecast future cash flow. For example, you have only spent $70K due to delays in getting a campaign started and hence expect to spend the additional $30K in future months. The delayed campaign may result in lower revenue, so you may need to lower your future revenue forecasts.
  3. Decision-making - Use the variance analysis from your cash flow forecast to make decisions about the business. In the above example, the lower spend on marketing could lead to decisions being made about timing of marketing campaigns, if it was due to a delay. Also it could mean that future revenue will be lower so you may need to consider additional actions to increase revenue or be prepared for lower inflows of cash.
  4. Continuous updates – It’s inevitable that changes will happen over time, be that with the economy, industry, suppliers or customers. Correspondingly, continuously updating your cash flow forecast for the upcoming 6 – 18 months will ensure you are still gaining precision and can use the cash flow guidance to make operational decisions and remain a dynamic business.