Cash forecast

Definition

A cash forecast is an estimation of a company's future financial liquidity over a specific period. It helps businesses ensure they have enough cash to meet obligations and make informed financial decisions.

5 Must Know Facts For Your Next Test

1. Cash forecasts typically include projections for cash inflows from sales, investments, and financing activities, as well as outflows for expenses and debt repayments.
2. They are crucial for managing working capital and ensuring that the business can meet short-term liabilities without running into liquidity issues.
3. Accurate cash forecasting can help a company avoid costly borrowing or missed investment opportunities by providing visibility into future cash needs.
4. Businesses often create both short-term (weekly or monthly) and long-term (quarterly or annually) cash forecasts to manage different aspects of their financial planning.
5. The accuracy of a cash forecast relies heavily on the quality of data used, including historical financial data, market trends, and economic conditions.

Review Questions

• What are the primary components included in a cash forecast?
• Why is accurate cash forecasting important for managing working capital?
• How does the quality of data impact the reliability of a cash forecast?

Related terms

Working Capital Management: The process of managing the short-term assets and liabilities to ensure sufficient liquidity.

Liquidity: The ability of a company to meet its short-term financial obligations.

Financial Planning: The task of determining how a business will afford to achieve its strategic goals and objectives.