Four Methods of Cash Flow Forecasting

 By: Toney Taylor
There is no way to overemphasize the importance of cash flow forecasting in corporate finance. When executed well, a cash flow analysis will accurately predict your company's financial liquidity over the next three, six, or even twelve months. Peaks and valleys won't catch you off guard, you'll be in a better position to budget your funds, and you'll have a good idea of whether or not your projected income will cover your costs. In essence, forecasting your cash flow is the best way to gauge your company's financial health and to diagnose any potential ailments in the coming quarters.

While "cash" typically refers only to liquid assets, a cash flow forecast deals with overall treasury management, in particular, the subtraction of short-term debts from a combination of your liquid assets and short-term investments.

There are several methods of cash flow forecasting: direct and indirect. Examine each of them to determine the best fit for your company.

Direct cash flow forecasting
The direct method-also known as the Receipts and Disbursements method-is based on actual data which is comprised of receipts (sales to customers, sales of assets, etc.) and disbursements (accounts payable, payroll/labor, etc.). Because it's based on tangible numbers, the direct method cash flow forecasting method is most fitting for shorter-term forecasts, one week to one financial quarter. (And, in rare cases, up to one year.) For most companies, the direct method is the best option for internal evaluation.

Indirect cash flow forecasting
Of the indirect methods, the most common is the Adjusted Net Income (ANI). Often used for annual reports, the ANI method begins with a company's net income and then adds or subtracts non-cash income or expenses. These might include owner's salary and personal expenses, amortization, depreciation, and anticipated one-time expenses. After the additions and subtractions, the resultant number is your net cash projection from all operating activities.

The Pro Forma Balance Sheet method is another indirect cash flow forecasting tool. It differs from a traditional balance sheet only in that it predicts how your company will manage its assets in the coming quarters. In essence, a Pro Forma Balance Sheet will predict your company's financial future based on your current balance sheet. This method is a simple equation: projected total assets will equal projected liabilities plus projected equity. Both the Adjusted Net Income and Pro Forma Balance Sheet methods are most useful for middle-term projections, from 6-12 months to several years.

The final indirect cash flow forecasting method is the Accrual Reversal method, which incorporates elements of the direct (R&D) and the ANI methods. This method uses algorithms and statistical distribution models, rather than a projected balance sheet, to reverse large accruals. The Accrual Reversal method is best for medium-term forecasting. It's also the most complicated of these four methods, so tread lightly.
Artice Source:
Article Tags: cash flow forecasting

Related Articles in Finance

People interested in the above article are also interested in the related articles listed below:

The Spring Budget 2017 was announced amidst much anticipation however, many feel that it was not the best job done by the exchequer. Although he covered different dimensions and tried to create a balance between various sectors, the budget is still not considered an exciting one by the experts. Some of the points work well on a long term basis while some are good for immediate effect.
Before you purchase your first home and finance your very first mortgage there are a few things to consider. Consider the following as you embark on your new life journey into homeownership. Before you hire a realtor or start looking at homes it is important to meet with a mortgage broker. Once you have met with a mortgage officer you can determine if you have credit problems that need to be solved prior to looking for a home.
Purchasing a contractor license bond is almost always a requirement of contractors before they are licensed to work on construction projects. Depending on the laws within the state, county, city or even subdivision a contractor license bond could be required. Without the necessary contractor license bond in place the contractors often cannot obtain the license that is needed to provide construction services.

More in Finance

Excellent, Larry. Thank you for taking the new article directory technology and making it work to the max. I encourage everyone to keep contributing and contributing regularly. I can attest to the fact that this site is already a strong directory in a field of many. Kudos to Larry!

Matthew C. Keegan
The Article Writer


I find it a delight to use both as an author and a publisher. It is full of nice little surprises that make the whole process of writing, reading and publishing articles a complete delight. This is one that comes out tops and beats the rest hands down.

Eric Garner
Managing Director


I did a Google search and came across your site. It was exactly what I was looking for and was elated to find such a broad range of articles. As I am launching a free magazine in a small town in Florida, I wanted to be as resourceful as possible while still being able to provide some content that is interesting and well written. Your site has all the variables in the mix. Excellent Site hitting all the notes in the scale sort of speak.

Mo Montana
Florida, USA

Article Topics

Copyright © 2005 - by Larry Lim, Singapore - Article Search Engine Directory at™
All Rights Reserved Worldwide. All Trademarks and Servicemarks are the property of the respective owners.
ArabicBulgarianCatalanChinese (Simplified)Chinese (Traditional)CzechDanishDutchEnglishEstonianFinnishFrenchGermanGreekHaitian CreoleHebrewHindiHungarianIndonesianItalianJapaneseKoreanLatvianLithuanianNorwegianPersianPolishPortugueseRomanianRussianSlovakSlovenianSpanishSwedishThaiTurkishUkranianVietnamese