Announcing new features for real-time, AI-assisted reconciliation. Learn more →

Learn

What is Cash Forecasting?

Welcome to Learn, where we provide straightforward, easy-to-understand definitions of the payments industry.

Follow us

Cash forecasting is a way for companies to look at “cash in” vs. “cash out” for a business over a window of time. Finance teams report cash forecasting on a statement of cash flows, per Generally Accepted Accounting Principles (GAAP).

These reports help companies manage cash efficiently, avoid cash shortages that could hurt the business, and earn returns on cash surpluses. Cash forecasting is important to help companies understand future cash positions and plan accordingly.

Why is Cash Forecasting Important?

Cash forecasting is an important part of treasury management to help companies properly manage funds and mitigate future risks. In other words, it helps them manage debt and grow predictably.

Debt Management

Accurate cash forecasting can help businesses pay off debt more efficiently. Most companies carry some type of debt, and debt payments can mean a lot of cash is flowing out of the business. Proper planning ensures that companies can afford to make those payments – including the principal and any interest payments – on time.

Cash forecasting also aids in compliance with debt covenants that may require companies to maintain a certain cash level to prove their financial health. Companies can avoid covenant breaches by understanding how cash flows in and out of the business. A breach could trigger enforcement of an acceleration clause, where a lender demands the balance of the loan in full.

Predictable Growth

Many companies rely on investors and churn through cash in the pursuit of growth. Cash forecasting allows a business to account for cash surpluses and plan for growth with greater precision.

What Does Cash Forecasting Look Like in Action?

Cash forecasting differs from company to company and depends on each organization’s objectives. Investor requirements, resources, and information availability may also impact how cash forecasting is executed.

Companies that carry large debts may use cash forecasting to better plan for payments over a longer term. Businesses that are tight on cash may focus more closely on short-term planning. Others may want to make sure there is enough working capital available to fund growth activities. Choosing the right cash forecasting timeframe depends on the primary objective of the business:

Short-term liquidity planning – focuses on cash availability over the next 30-60 days to make sure the company can meet obligations in the near term.

Medium-term liquidity planning – typically looks at cash through the end of a rolling 12-month period or the end of the current fiscal cycle.

Long-term liquidity planning – focuses on cash availability forecasting for periods of more than one year.

Companies must also choose the right forecasting method. That choice will depend largely on the timeframe and what type of data is available to build the model. The direct method is best for organizations that can use actual flow data (accounts payable/accounts receivable, bank accounts, payroll, collections) to look at expected transactions occurring within the next 90 days. Beyond that time frame, actual cash flow data may not be available or accurate.

The indirect method is less accurate, as it relies on income statement and balance sheet derivations. Still, it is a good method for companies that want to look at the projected cash availability for longer-term capital projects and growth.

Try Modern Treasury

See how smooth payment operations can be.

Talk to sales
More from

Learn

Learn topic image

Learn about the key processes involved in treasury management.

A clearing account acts as a temporary account that holds transactions before they are finalized or allocated to the correct permanent account.

Read more

Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.

Read more

Financial reporting empowers businesses to make informed financial decisions by identifying trends and tracking performance. It also offers insights into a company's assets, liabilities, and debt management strategies.

Read more

Month-end close is a critical process where the accounting team reviews and records financial transactions to close out the month.

Read more

Recoupment refers to the recovery of spent or lost funds, especially in business operations.

Read more

Treasury Management Systems (TMS) are software applications that serve to help businesses simplify their payment operations by automatically tracking things like cash flow, assets, investments, and more.

Read more

Asset risk management is essentially a fusion of asset management and risk management.

Read more

Cash forecasting is a way for companies to look at “cash in” vs. “cash out” for a business over a window of time.

Read more

Cash pooling is a centralized cash management tool that companies with multiple subsidiaries sometimes use to optimize the cash balances of all legal entities.

Read more

Liquidity management provides visibility into cash positions over past, present, and future dates and provides an overview of the financial health of a business.

Read more

Treasury management is the act of managing a company’s daily cash flows and larger-scale decisions when it comes to finances.

Read more

The 10-K is a comprehensive report mandated by the U.S. Securities and Exchange Commission (SEC) that publicly traded companies must file annually. This report provides a thorough overview of a company's financial performance over the past year.

Read more

Subscribe to Journal updates

Discover product features and get primers on the payments industry.

Subscribe

Products

Platform

Modern Treasury For

Case Studies

Insights

Documentation

Company

Legal


Popular Integrations

© Modern Treasury Corp.