Importance of cash flow forecast and statement | HighRadius (2024)

24 July, 2024

10 mins

For any business, keeping track of cash flow is essential for maintaining financial stability and ensuring long-term success. Without a clear understanding of cash flow, companies can quickly find themselves in trouble, unable to pay bills or invest in growth opportunities.Two important tools that businesses use to manage their cash flow are cash flow statements and cash flow forecasts. However, there’s often some confusion and misconceptions surrounding the two.

The cash flow statement records the actual money coming in and going out during a specific period, showing the company’s financial health, whereas a cash flow forecast predicts future cash flows, helping businesses plan and ensure they have enough cash to meet obligations. Both tools are crucial for effective financial management, but they serve different purposes and offer unique insights.

In this blog, we will compare and contrast these two tools, clarify their differences, and discuss how they are used to help businesses achieve long-term success.

Cash flow is typically categorized into three main types: cash flow from operations, cash flow from investing, and cash flow from financing. These components play a critical role in financial analysis, allowing you to evaluate a company’s operational performance, investment decisions, and financial strategies.

1. Cash flow from operating activities

Cash flow from operating activities indicates the cash earned or used in the company’s main business activities. This includes cash payments, revenue generation, paying expenses, and funding working capital. It measures the ability of a company to generate cash from its core business operations.

2. Cash flow from investing activities

Cash flow from investing activities measures the cash generated or spent on investments in assets such as property, equipment, or technology. It reflects the changes in a company’s long-term investments and capital expenditures, providing insights into its growth and strategic decisions.

3. Cash flow from financing activities

Cash flow from financing activities measures the cash inflows and outflows related to a company’s financing activities. Financing activities may include borrowing, repaying debt, issuing or repurchasing stock, and paying dividends. It provides insights into how a company raises capital and manages its financial structure.

A cash flow forecast estimates a business’s cash inflows and outflows over a specific period. It helps predict liquidity, ensuring sufficient cash to meet obligations and make informed financial decisions. By forecasting cash flow, companies can anticipate shortfalls, plan for investments, and maintain adequate cash reserves.

Cash flow forecasting is an essential financial management tool that helps businesses and individuals predict future cash inflows and outflows. Here are several reasons why cash flow forecasting is important:

1. Identifies cash flow trends

Cash flow forecasting helps businesses identify patterns, such as seasonal fluctuations in revenue and expenses. It provides insights into the underperforming and overperforming business components and highlights areas where the business might be able to improve efficiency and reduce unnecessary expenses.

2. Ensures liquidity

Cash flow forecasting helps businesses anticipate periods of cash shortages and take proactive measures to mitigate them, ensuring that the business has enough cash to cover day-to-day operations, pay employees, and meet other obligations. It also enables businesses to plan for unexpected expenses and emergencies, ensuring financial stability in the face of unforeseen events.

3. Improves financial planning

Cash flow forecasting helps create more accurate budgets by providing insights into expected cash movements. It also assists in long-term strategic planning by identifying future cash requirements for expansions, investments, and other significant expenditures. Moreover, it enables businesses to set realistic financial goals and track their progress over time, ensuring that strategic objectives are met effectively.

4. Optimizes working capital

Cash flow forecasting helps businesses maintain optimal inventory levels to avoid overstocking or stockouts. It also enhances the management of receivables and payables by providing a clear picture of expected cash inflows and outflows. It helps identify opportunities to optimize payment cycles and improve overall cash conversion cycles, leading to more efficient use of working capital.

5. Facilitates decision-making

Cash flow forecasting helps businesses determine when they can afford to invest in new projects or assets, identifies when external financing might be needed, and helps in planning for such needs. It also provides a basis for making informed decisions regarding cost-cutting measures or operational adjustments during periods of financial uncertainty.

A cash flow statement is a financial document that provides a detailed summary of all the cash inflows and outflows of a business over a specific time period. It is one of the important financial documents, along with the balance sheet and income statement, that is used to evaluate the financial health of a company.

Below we can see the consolidated cash flow statement of Hershey’s for 2023 which highlights the cash flow from operating, investing and financing activities.

Source

The cash flow statement is crucial for understanding a company’s financial health and cash management capabilities. Analyzing cash flows helps stakeholders assess liquidity, operational efficiency, and financial sustainability. Let us understand the factors that make cash flow statements extremely important for businesses:

1. Identifying the optimal cash balance

The cash flow statement is crucial for determining the optimal cash balance level. It helps the company assess whether funds are idle, there is a cash shortfall, or if the funds are excessive. With a clear picture of the current cash situation, management can make informed decisions about the company’s financial strategy.

2. Short and long-term planning

The cash flow statement helps businesses estimate future cash flow based on historical data of cash inflows and outflows, enabling effective short-term financial management. Long-term planning is crucial for a company’s growth, and the cash flow statement identifies necessary improvements to enhance financial stability, helping management prioritize key business tasks.

3. Working capital analysis

The cash flow statement provides a detailed view of how efficiently a company manages its current assets and liabilities, which directly impacts its cash flow. By monitoring changes in working capital over time through the cash flow statement, businesses can assess their ability to meet short-term financial obligations, manage cash effectively, and plan for future investments. This analysis helps in optimizing cash flow management strategies and identifying areas for improvement in working capital efficiency.

4. Transparency and accountability

The cash flow statement provides details on the actual cash inflows and outflows from operating, investing, and financing activities. This allows stakeholders and investors to understand the overall financial health of the company. This transparency helps in building trust and confidence among stakeholders by demonstrating how effectively the company manages its cash resources and meets its financial obligations.

The cash flow forecast and cash flow statement are both crucial financial tools, but they serve different purposes and provide different insights into a company’s financial health. Here’s a detailed comparison:

The cash flow forecast and the cash flow statement play complementary roles in comprehensive financial management, each providing unique insights that together offer a complete picture of a company’s cash flow dynamics.

1. Predictive vs. historical insights

The cash flow forecast predicts future cash flows based on historical data, helping businesses plan and allocate resources efficiently. The cash flow statement, on the other hand, provides a historical record, showing the actual cash flows over a specific period.

2. Proactive vs. reactive management

The cash flow forecast allows businesses to proactively manage potential cash shortages or surpluses, while cash flow statements enable reactive adjustments based on past performance.

3. Budgeting and strategy

The cash flow forecast provides insights for budgeting and strategic planning, ensuring alignment with financial goals, while cash flow statements validate the accuracy of these forecasts and strategies by comparing predicted and actual performance.

4. Enhanced financial visibility

Together, the cash flow projection and the cash flow statement offer enhanced financial visibility by providing both a glimpse of future financial conditions and a detailed account of past financial activities. The forecast allows for proactive planning and strategic initiatives, while the statement ensures transparency, accountability, and a clear understanding of the company’s financial trajectory.

HighRadius offers a cloud-based treasury management solution that streamlines and automates treasury operations, including cash forecasting, cash management, and treasury payments. We have empowered the world's leading companies, like Danone, HNTB, Harris, and Konica Minolta, to optimize their cash forecasting accuracy, make decisions faster with real-time bank data, and reduce bank fees.

Our cash forecasting software leverages advanced technologies such as artificial intelligence (AI) and machine learning (ML) and integrates with banks and ERPs to get AR/AP data, improve ML prediction rates, and enable treasurers to achieve accurate, real-time cash forecasting. Businesses can forecast cash into any category or entity on a daily, weekly, and monthly basis with up to 95% accuracy, perform what-if scenarios, and compare actuals vs. forecasted cash.

Our cash management software automates the reconciliation process between bank statements and internal financial records, reducing manual effort and errors and increasing cash management productivity by 70%. With our treasury and risk solutions, treasury professionals gain instant, personalized insight into their cash positions with unparalleled global visibility.

1. What is the difference between a cash flow statement and a cash flow plan?

A cash flow statement is a financial document that details actual cash inflows and outflows over a specific period, showing past financial performance. In contrast, a cash flow plan is a forward-looking cash flow projection that estimates future cash inflows and outflows to aid in financial planning and decision-making.

2. What is the difference between cash flow and fund flow statements?

A cash flow statement details actual inflows and outflows of cash within a specific period, highlighting liquidity and operational efficiency. In contrast, a fund flow statement analyzes the changes in financial position between two balance sheet dates, focusing on the movement of working capital and overall financial stability.

3. Are cash flow analysis and cash flow statement the same?

No, a cash flow analysis and a cash flow statement are not the same. The cash flow statement is a financial document detailing actual cash inflows and outflows. In contrast, cash flow analysis is the process of reviewing and interpreting this statement to assess a company’s liquidity and financial health.

4. Why use a cash flow forecast?

A cash flow forecast is used to predict future cash inflows and outflows, helping businesses ensure they have sufficient liquidity to meet obligations, plan for investments, and avoid cash shortages. It aids in proactive financial planning, risk management, and informed decision-making.

5. What are the three types of cash flow statements?

The three types of cash flow statements are operating activities, which show cash flows from core business operations; investing activities, which show cash flows from asset purchases and sales; and financing activities, which include cash flows from debt, equity, and dividend transactions.