There are two main types of cash flow forecasting: short term and long term. Short-term forecasting predicts the company’s cash flow for under 12 months, while long-term forecasting looks beyond twelve months. Financial professionals often agonize over which one to use, but most organizations need both.
What Is a Short-Term Cash Flow Forecast?
Short-term forecasting looks at the cash inflows and outflows over a shorter period. Standard projection intervals include 30 days, sixty days, or 90 days. Financial professionals use this to predict short-term liquidity problems and make decisions about short-term investments.
What Is the Importance of a Short-Term Cash Flow Forecast?
Short-term forecasting uses historical data, current trends, and reasonable assumptions about the future to predict cash flow. One of the best advantages of short-term forecasting is that shorter periods involve fewer variables. Consequently, it can lead to more accurate forecasts than 12-month projections.
Accountants can also easily integrate short-term projections into long-term cash flow forecasts. Doing so can answer these questions and more:
- How much cash do we have on hand, and when will it run out?
- What are our short-term financing needs?
- What are the cash flow implications of upcoming investments or projects?
What Is a Long-Term Cash Flow Forecast?
Long-term forecasting makes calculations for 12 months or more. Some can span several years or break into several twelve-month periods. Financial professionals use long term forecasts to predict a company’s ability to generate cash in the future and to make long-term investment decisions.
What Is the Importance of a Long-Term Cash Flow Forecast?
Long-term forecasting uses the same data as short-term forecasts, but it looks at historical data over a more extended period. One of the best advantages of long-term forecasting is that it helps managers better understand and estimate the future returns on current investments. Additionally, it allows accountants to ascertain whether they need to adjust credit strategies.
There are several differences between short- and long-term forecasting, but the main one is that short-term forecasts are more reactive, while long term forecasts are more proactive. Long-term forecasts can help organizations answer these and other essential questions:
- How much money will we need for capital expenditures in the future?
- How will new products or services affect our cash flow?
- What are our long-term financing needs?
7 Common Cashflow Forecast Methods
There are various cash flow forecast methods, but which one you use will depend on the data you have and the questions you’re trying to answer.
Consider these common methods:
- Cash budgeting: This approach creates a projected cash flow for a specific period, usually one year.
- Judgmental: This approach uses the financial professional’s experience and judgment to make predictions.
- Ratio analysis: This method compares different aspects of a company’s financial health to cash flow to find correlations.
- Regression analysis: This approach uses historical data to identify relationships between different factors and cash flow.
- Simulation: This method uses mathematical models to simulate different scenarios and predict their effect on cash flow.
- Statement analysis: This approach looks at a company’s financial statements to see trends and relationships between different factors and cash flow.
- Trend analysis: This method looks at how past cash flow has changed over time and attempts to predict future trends.
What Are the Advantages of Automated Cash Flow Forecasting?
Automation eliminates the manual components behind the data collection process, making it more efficient. Yet some companies have done forecasting by hand and spreadsheet software for so long that they need a lot of convincing. If you are undecided or need to convince the decision-makers in your company, consider the following benefits:
- Availability of the historical view of cash flow trends at all times
- Easy identification of relationships and trends in the data
- Increased accuracy and consistency of data due to automation of the data collection process
- Real-time updates as circumstances change
- Reduction in time it takes to generate forecasts
How Can Automated Accounts Receivable Software Help?
Automated AR software can help organizations identify and collect payments more quickly, improving their cash flow position. Additionally, organizations make better decisions about extending credit and securing credit using up-to-date information about customers’ credit statuses.
Automating the data collection process removes the potential for human error and ensures all relevant data is included in your forecasts. This allows you to spend more time analyzing the data and less time on data entry. Automated updates ensure accurate and up-to-date information.
Gaviti has emerged as one of the most trusted names in the AR automation field. Companies use our software to streamline accounts receivable, reduce DSO and increase cash flow.
Book your free demo to leverage the power of automation for your business.