Importance of Cash Flow Forecasts
Cash flow forecasts are often at the centre of a business plan’s financing section providing prima-facie information of the future success of the proposed venture.
It may demonstrate that even though the new business will initially draw cash in order to start-up, it will eventually become a financially rich enterprise, able repay investors a handsome return on their investment.
Periods Covered by a Cash Flow Forecast
The period over which a cash flow forecast might extend would be determined by the information needs of stakeholders and the degree of accuracy future income and expenditure can be reasonably be predicted.
The preparation of a cash flow forecast is largely a subjective exercise and this become even more so as the estimates of the future extend to years instead of months.
Even though monetary flows purported to occur in several years time might be difficult to substantiate, efforts should generally still be employed to accomplish this task.
This might, at the very least, suggest that the management have considered the longer term cash generation within the business and at best, provide investors with the comfort that their investments may reach the point of fruition.
Cash Flow Segments
Cash Flow Forecasts are generally broken down in to monthly or quarterly segments and would show each significant item of income and expenditure relevant to the new business.
As the period covered by the cash flow extends, the segments might be enlarged to six monthly or yearly to show a picture of general flows rather than detailed month by month deposits and payments.
