Question

What is a cash flow forecast and why is it a useful report? (100–150 words)

Answer 1

A cash flow forecast is a projected statement showing the expected cash inflows and outflows of a firm for a future period of time and the resultant cash balances.

The cash flows are categorized as receipts [inflows] and disbursements [outflows] and shown in that order.

While the receipts include receipts from sales [cash sales or from receivables], other income, issue of debt or other capital, etc; the outflows would include payments for purchases/services, payments to employees, operating expenses, capital expenditure, debt servicing, taxes and so on.

The ending portion would be the cash balance.

A cash flow forecast for a particular period is further split into forecasts for shorter periods.

The benefits of a cash flow report are:

*It shows up what the cash outflows and inflows are for a period, which details can be used for controlling those cash flows by comparing with actuals on a periodic basis. Thus, the statement is a tool for planning and control.

*It will show up the cash deficits or surpluses that would occur over a period. That information can be used to plan in advance for making up shortfalls and for investing the surplus. The in-economies of unplanned for decisions can be avoided.