5 min

Direct vs indirect cash flow forecasting: which method works best for your business?

Author
Naomi Goldberg
Published
Nov 4
, 
2024

Key Takeaways:

  1. Direct forecasting method provides a detailed view of actual cash inflows and outflows, making it ideal for short-term cash management and operational planning.
  2. Indirect forecasting method uses financial statements to predict future cash flow, making it more suitable for long-term strategic planning and financial analysis.
  3. Businesses should use the direct method for day-to-day cash monitoring and the indirect method for aligning cash flow with broader financial goals.
  4. Utilizing both forecasting methods can give a comprehensive view of a company’s cash position, balancing short-term needs with long-term financial strategy.

Direct cash flow forecasting, sometimes known as the 'receipts and disbursement method,' predicts future cash inflows and outflows by collecting expected cash receipts and payments over short-term periods, usually weeks or months. Focusing on detailed operational data such as customer payments and vendor obligations creates more precise direct cash flow forecasts.

How to Build a Direct Cash Flow Forecast

Step 1: Gather data on expected cash inflows like customer payments, loan proceeds, and other impending revenue sources.

Step 2: Identify all anticipated cash outflows such as supplier payments, payroll expenses, rent, utilities, and other cash expenditures.

Step 3: Create a weekly or monthly timeline to organize and sort cash inflows and outflows, marking expected dates. 

Step 4: Compile the detailed transaction data for each period to map out the expected cash movements.

Step 5: Analyze the specific periods of cash surpluses and deficits by comparing the total cash inflows against the total cash outflows.

Step 6: Adjust the forecast for any predicted changes in operational activities, pricing, or external factors that can influence cash transactions.

Step 7: Regularly review and update the forecasted data to ensure it aligns with real-time business activities and market trends.

Indirect Cash Flow Forecasting

Indirect cash flow forecasting uses historical financial statements to predict future cash flows. Examining the relationship between net income and changes in balance sheet accounts (e.g. accounts receivable and payables) provides an indirect view into cash inflows and outflows. Although less detailed than direct forecasting, this method captures the overall financial picture, while anticipating future cash needs.

For the indirect approach, you’ll likely use the following primary methods: 

  • Adjusted Net Income (ANI): This method begins with net income and adjusts it for non-cash items, such as depreciation and amortization. By reconciling these figures, ANI provides a clear picture of actual cash generated by operations, helping businesses create more accurate projections.
  • Pro Forma Balance Sheet (PBS): Here, you’ll use a forward-looking balance sheet to estimate future financial standing. By forecasting changes in assets and liabilities, PBS anticipates future cash flows and identifies potential liquidity challenges.
  • Accrual Reversal Method (ARM): This approach reverses accruals to convert accrual-based net income into cash flow. Noting the timing differences between earning revenues and incurring expenses aligns projected net income with the expected cash position.

To sum it up, direct forecasting relies on real cash flow data, although it’s less reliable in the long run as you’ll eventually run out of data. Indirect forecasting uses projected financial statements, which are helpful in long-term planning.

The direct method offers a detailed view of actual cash movements, making it ideal for short-term management, while the indirect method provides a broader perspective suitable for long-term strategic planning

How to Create an Indirect Cash Flow Forecast

Use the steps below to create an indirect cash flow forecast:

Step 1: Gather historical financial statements (e.g. historical income statements, balance sheets, and cash flow statements) going back at least 12-24 months. This information is the foundation of your forecast.

Step 2: Define the forecast period as monthly, quarterly, or annually, depending on your business's needs and the level of detail needed.

Step 3: Use your company's historical or projected income statement to Identify the net income figure for each period within your forecast period.

Step 4: Identify and adjust for non-cash items that affect net income but do not impact cash flow. 

Step 5: Analyze changes in working capital items (e.g. accounts receivable, accounts payable, and inventory) that can significantly affect cash flow. Calculate the change in each item for each period in your forecast. 

Step 6: Factor in capital expenditures (CapEx). These represent cash outflows for purchasing assets such as equipment, machinery, or property. Estimate when these expenditures will occur during your forecast period.

Step 7: Consider financing activities that affect cash flow, such as:

  • Include any loans or credit facilities that provide cash inflow
  • Principal repayments, which are cash outflows
  • Capital raised through equity issuances

Step 8: For each period in your forecast, calculate the change in cash by adding or subtracting the adjustments in steps 4, 5, 6, and 7 from the net income figure (step 3). The result is the net cash provided by (or used in) operating activities.

Step 9: Start with the cash balance for the first period in your forecast and calculate the ending cash balance for each period by adding the change in cash (step 8) to the beginning cash balance of that period.

Step 10: Regularly update and review your cash flow forecast through the forecast period. Compare actual results to your forecast, and make adjustments to reflect changes in business conditions, assumptions, or strategies.

Before selecting a method, it helps to familiarize yourself with the advantages and disadvantages of each option.

Advantages of the Direct Method

Simplicity: Directly recording cash inflows and outflows allows for straightforward tracking and an understanding of cash positions. 

Immediacy: The direct method captures real-time cash movements, making it ideal for preparing daily and weekly reports for short-term decision-making. 

Accuracy:  Businesses can gauge their liquidity with a bottom-up approach, minimizing errors that can occur in more complex forecasting methods. 

Small Companies: Its simplicity and transparency help entrepreneurs without extensive financial backgrounds to effectively manage their finances. 

Disadvantages of the Direct Method

Resource intensive: The direct method requires  detailed tracking of every transaction t. This level of detail can be time-consuming, especially for businesses with a large volume of transactions.

Short-term only: This method is less effective for long-term forecasting. It focuses on upcoming transactions which might not provide a complete financial picture over an extended period.

Non-Cash Transactions Overlooked: By focusing solely on cash transactions, Direct ignores non-cash factors, which can lead to inaccurate forecasts for businesses with more complex accounting structures. 

Dependency on Historical Data: Past data isn't always a reliable predictor of future conditions, particularly in rapidly evolving industries. Historical data means relying on indirect forecasting, which may not be able to adapt to market shifts or unexpected changes. This can result in cash flow mismatches.

Advantages of the Indirect Method

Longer-term view: The indirect method shows a long-term view of a business's cash flow, which is ideal for strategic planning. By starting with net income and adjusting for non-cash transactions, it offers insights into the broader financial impacts and sustainability. 

Understanding non-cash impacts: Incorporating non-cash transactions like depreciation and amortization provides deeper insights into your financial health. 

Accounts for future transactions: Using both historical financial data and non-cash adjustments gives you a better understanding of cash flow patterns and makes it easier to predict future financial transactions.

Disadvantages of the Indirect Method

Complex: Indirect cash flow forecasting is complex and often requires a deep analysis of financial statements, at challenge for those unfamiliar with intricate accounting methods.

Reliant on assumptions: The indirect method relies on estimates and assumptions, which can lead to inaccuracies if these assumptions do not hold.

Time-consuming: This method can be time-consuming, especially for startups or small businesses lacking comprehensive financial information or resources.

Not suitable urgent decision-making: It may not pinpoint short-term cash flow fluctuations accurately and can hinder rapid decision-making in pressing situations.

Criteria Direct Indirect
Data Source: Uses actual cash transactions Relies on accounting income and adjustments
Level of Detail: A detailed view of a company’s cash position as a broader perspective, focusing on overall financial health and strategic planning
Accuracy: High for short-term projections Varies, better for long-term forecasts
Complexity Simpler for businesses with straightforward transactions More complex due to multiple adjustments needed
Time Frame Suitability Best for immediate and near-term forecasting Ideal for long-term strategic planning
Forecasting Model Real-time cash flow tracking Uses balance sheet and income statement changes
Ease of Use Less burdensome for small businesses Preferred by larger entities with complex financials

‍
When to Use Direct vs Indirect Forecasting

Startups and Small Businesses: Direct forecasting can be beneficial for startups and small businesses that need immediate visibility into their cash flow. Since these companies often deal with short-term cash needs and have simpler financial situations, the direct method gives a clear picture of their actual cash inflows and outflows.

Manufacturing Companies: For industries like manufacturing—which has complex operational requirements and large volumes of transactions— indirect forecasting is more useful. This method helps businesses understand long-term financial health by analyzing comprehensive financial statements and adjusting for inventory, payables, and receivables.

Retail Chains: Large retail chains with predictable sales patterns might lean towards indirect forecasting. The ability to leverage historical data for accruals makes it easier to project future cash flows based on past trends rather than current transactions.

Project-Based Businesses: Companies engaged in project-based work, such as construction or consulting, can combine both methods. By using direct forecasting for specific projects and indirect methods for overall financial stability, they can effectively manage short-term project cash flow needs and long-term financial planning.

Real Estate: Companies with multiple entities that heavily rely on cash, including real estate, hotels and other similar industries will combine a mix of both direct and indirect forecasting. Direct forecasting helps with day-to-day and operational decisions, while indirect forecasting informs long-term strategy and investment planning.

Other Factors to Consider When Choosing a Cash Flow Forecasting Method

Beyond industry or your business’s size, you can also choose a method based on the following factors:

‍Your goals: Is your focus short-term precision or long-term strategy? If you need granular cash flow insights for day-to-day cash management, direct forecasting might be more advantageous. If you need a long-term financial strategy, indirect forecasting provides a high-level perspective.

The data you have: What quality and quantity of historical financial data can you access? Direct cash flow forecasting relies on real-time cash transaction data, which isn’t always readily available. If you lack direct cash flow data, indirect forecasting based on financial statements can be a solid alternative.

‍Consider your resources: Note your available resources for data management and financial modeling capabilities. Direct forecasting can be data-intensive and may require sophisticated cash management systems. Indirect forecasting isn’t as resource-intensive and doesn’t require as much data mining.

Define timelines: Define the timeframes and list short-term and long-term goals. Direct forecasting provides short-term precision, while indirect forecasting can shed insights useful for strategic long-term planning.

Which is Better: The Direct or Indirect Method?

Understanding direct and indirect cash flow forecasting methods is crucial for effective financial planning. Each method has distinct advantages and challenges, tailored to different business objectives. 

For more precise, day-to-day cash management, direct forecasting offers clarity and immediate results. If your aim is comprehensive financial reporting and strategic planning, opt for the indirect method. 

When choosing which method best aligns with your company’s financial goals, consider the size of your business, the level of detail you require, and the resources at your disposal. Evaluating these factors will help create a cash flow management strategy you can feel confident with.

Panax’s flexible AI and Automation based Forecasting

Panax understands that companies with lean finance teams and complex treasury needs want flexible, accurate forecasting. AI-driven categorization within the Panax platform means forecasts are more accurate, and you can compare forecasts to actuals for increased accuracy and reporting. 

Within the Panax platform you can choose weekly or monthly forecasting options, and combine forecasting for scenario planning. Panax allows you to create forecasts that automatically roll week/week or month/month based on updated actuals - allowing you to focus on gaining insights instead and making decisions instead of on data entry.

To get a personalized demo of Panax’s forecasting capabilities, sign up here.

‍

Subscribe to our blog
Cash Forecasting In Times of Financial Uncertainty
Download our free guide and discover how AI and automation are reshaping cash management in today’s volatile economy
Download Guide
panaxpanax

Transform Cash Management, Unlock Growth

Streamline cash forecasting, mitigate cash risks, and gain actionable insights to drive smarter financial decisions.
Get a Demo
panaxpanax
Related Articles
Cash Forecasting
12-Month cash flow forecast explained

A 12-month cash flow forecast is a financial tool businesses use to project their cash inflows and outflows over the course of a year (ie,how high its income and expenses during the year).This forecast helps companies anticipate future cash movements, reduce financial risks and create financial long term financial plans. 

For example, a 12-month rolling forecast could be January through December 2025. When January 2026’s results are finalized, you could replace it with January 2027. The forecast encompasses 12 months, but slides forward every month.

Why is a 12-month cash forecast important for businesses?

While shorter time frames such as a 13-week cash flow forecast or monthly updates provide valuable short term insights, a 12-month cash flow forecast provides a comprehensive view that can bolster long-term strategic planning. A 12-month forecast leaves room for seasonal fluctuations in cash inflows and outflows. Understanding these patterns allows you to strategically allocate resources, prepare for potential downswings, and capitalize on peak periods.

A year-long forecast also provides the extended visibility needed for informed capital expenditure planning and investment decisions. It gives your business the foresight to align funding strategies with projected cash availability, supporting sustainable growth and expansion.  Over a 12-month horizon, companies can predict and mitigate cash shortages, enabling operational agility and financial stability. This is especially important for companies looking at longer term, large financial events, such as mergers, acquisitions or raising capital.

A 12-month cash flow forecast provides a comprehensive view that can bolster long-term strategic planning

How does a 12-month cash flow forecast work?

Creating a 12-month cash flow forecast is actually pretty simple; Businesses must compare the expected income with the expected expenditure for each month. Then, they’ll subtract the expenses from the income, showing whether the expenses exceeds the income or if the month ended in a surplus or deficit.

In order to make those calculations, you must gather historical data (e.g. all revenue and expenses). To make these types of forecasts more accurate, companies may pull their ERP data from the last year.

Revenue might include:

  • Customer payments
  • Cash sales
  • Subsidies and other funding
  • Tax refunds 
  • Income from financial investments
  • Income from licenses or patents 

Expenditures might include:

  • Employee salaries
  • Rent for office spaces, warehouses, and/or production halls
  • Supplier payments
  • Software license fees 
  • Operating costs such as water, electricity, internet, and so on
  • Insurances 
  • Marketing costs

Typically 12-month forecasts—which include rolling updates— segment revenue and expenses into three primary components: operating activities, investing activities, and financing activities.

Operating Activities

  • Revenues: Sales revenue, service income, accounts receivable collections
  • Expenses: Salaries and wages, rent, utility bills, supplies, and accounts payable disbursements

Investing Activities

  • Revenues: Sale of fixed assets, dividends from investments
  • Expenses: Purchase of equipment, investment in securities, capital expenditures

Financing Activities

  • Revenues: Proceeds from loans, issuance of shares or bonds
  • Expenses: Loan repayments, dividend payments, share buybacks

All three components show businesses where cash originates from and how it is utilized. A rolling 12-month forecast gives a  continuous and forward-looking view of their cash dynamics, a vital part of strategic planning and financial stability.

Three tips for creating a 12 month forecast

  1. Remember the company’s mission: Rolling forecasts tend to be more successful when it’s aligned to the company’s objectives and goals.
  2. Invest in the right tools: spreadsheets passed from department to department could lead to disjointed and error-prone documentation. Consider a flexible forecasting software that will increase accuracy and save resources.
  3. Adjust forecasts as necessary: Revisit the forecast and compare it to actual results so you can make adjustments.

How often should a cash flow forecast be updated?

Regularly updating cash flow forecasts is crucial for effective financial management. Ideally, businesses should update cash flow forecasts monthly, or even weekly to reflect the most up-to-date financial data and to accommodate any changes in market conditions or business operations. 

To control liquidity and accurately forecast, especially in uncertain economic periods, companies may even want to create several versions of their forecast. This means that they are able to compare scenarios, and accurately run scenario planning. 

This practice helps identify potential liquidity issues early so businesses can proactively  make informed financial decisions. Regular forecast updates not only track business performance, but also ensure that strategic plans align with current financial realities.

For example, if businesses see unplanned or unexplained discrepancies between forecasted and actual cash flows, they can correct them to maintain accuracy.

An Easier Way to Build 12-Month Forecasts

A 12-month cash flow forecast provides critical insight into a business’s financial health during a significant period of time, which provides enough data to better prepare for uncertainties and exercise  strategic decision-making.

Though Excel can create 12-month forecasts, the process is very manual, time-consuming and prone to human errors. Excel also doesn’t make it easy for teams to collaborate, to grant permissions to different people in different teams, or to easily share reporting. 

Panax offers an AI-driven cash management platform for lean finance teams with complex treasury needs. Panax's automation and AI makes categorizing transactions easier and quicker, and creates fuller data for forecasting. Panax offers weekly, monthly and long term forecasts based on ERP data and AI algorithms, offering flexibility to pull the relevant data into your forecast, and update it with ease. All together it makes it easy to forecast for your company, so you can optimize liquidity and work more efficiently.

Want to learn more about how Panax’s flexible forecasting can help you and your team work better? Get a demo today‍

Naomi Goldberg
5 min
Cash Forecasting
What is cash flow forecasting?

Cash flow forecasting is the process of estimating the business’s future cash levels over a specific period of time. This financial management tool helps businesses anticipate cash shortages or surpluses, allowing them to make informed operational and strategic decisions.

By accurately predicting future cash levels, companies can ensure they have enough liquidity to meet their financial obligations, invest in growth opportunities, and avoid unnecessary borrowing costs.

Cash flow forecasting is a crucial financial tool that helps businesses predict their future financial position. By anticipating the inflow and outflow of cash, companies can better understand their future cash positions, enabling them to make informed strategic decisions. This forecasting ensures that funds are available to cover obligations as they arise, thereby maintaining liquidity and avoiding potential cash shortages.

Essentially, cash flow forecasting provides a roadmap for financial planning, enhancing a company's ability to navigate future financial landscapes with confidence.

Cash Flow Forecasting vs Budgeting

A cash flow forecast predicts when income and expense charges come in and out of the bank account. A budget helps plan resources and capital for a project or business objective.

Budgeting provides a detailed financial roadmap, outlining projected revenues, costs, and resources. In contrast, cash flow forecasting zeroes in on when exactly these financial movements will occur.

Though different in focus, cash flow forecasting and budgeting are complementary. Budgets set financial targets and allocation plans that cash flow forecasts monitor in real-time. By integrating both, businesses ensure they are not only planning their finances meticulously but also dynamically adapting to cash movements. This combination helps balance long-term goals with current financial health, for accurate financial decision-making and skilled strategic planning.

Real-World Example of a Cash Flow Forecast

ABC Inc. is a  small hardware store. ABC Inc. wants to estimate the cash coming in and going out for September to ensure they can cover all their expenses and plan for any unexpected costs.

They’ll start by listing their expected cash inflows. This includes:

1. Sales revenue: $25,000
2. Customer payments on outstanding invoices: $7,000
3. Investment income: $1,000

The total of the above figures gives ABC Inc. a total projected inflow of $33,000 for September.

Next, they list their expected cash outflows, such as:

1. Supplier payments: $10,000
2. Employee salaries: $8,000
3. Utility bills: $1,500
4. Rent: $3,000

Miscellaneous expenses: $1,000

The total projected outflow amounts to $23,500.

By comparing the inflows and outflows, ABC Inc. calculates a net cash flow of $9,500 for September, meaning the business will have a surplus, leaving room for investment or savings for unforeseen expenses.

ABC Inc. will continuously update their forecast as data comes in, allowing them to adjust their spending and prediction models to maintain healthy liquidity. This proactive approach helps them to smoothly navigate through financial uncertainties.

How to Create a Cash Flow Forecast

Creating a cash flow forecast involves several key steps:

1. Determine your forecasting objective
2. Choose forecasting period (short term e.g. 13 weeks or long term e.g. 12 months forecast)
3. Choose forecasting method (direct or indirect)
4. Source your financial data

See this article for a more detailed guide on how to build a cash flow forecast

Why is Cash Flow Forecasting Important

Cash flow forecasting offers several key benefits that drive business success. Here’s a list of reasons why this tool is important.

Improved financial planning

By accurately predicting future cash inflows and outflows, you can ensure that your business remains solvent and can cover its obligations. Financial planning enables precise budgeting and resource allocation to areas that promise the highest returns.

Risk management

With a clear picture of your cash flow, you can identify potential shortfalls well in advance. This proactive approach allows you to address issues before they become critical, whether by securing additional funding or strategically adjusting expenditures.

Better decision making

Equipped with detailed financial projections, you can make informed decisions such as when to expand, invest in new projects, or reduce costs. This not only supports growth but enhances your ability to respond quickly to changing market conditions.

Cash flow forecasting is a crucial tool that allows businesses to proactively manage their financial health. Whether it's allocating funds for new investments, paying down debt, or simply ensuring that all bills are paid on time, cash flow forecasting provides the clarity needed to make informed financial decisions.

Difference Between Cash Management, Cash Forecasting & Liquidity management

While interrelated, each financial tool has a distinct role in managing a company's cash and overall financial health. Let's break down the differences:

Cash management: This refers to the broad process of collecting, managing, and investing a company's cash and cash equivalents. The primary goal of cash management is to optimize liquidity, ensuring that the company has enough funds to meet its short-term obligations, while maximizing returns on any idle funds. Put simply,, cash management is about making the most efficient use of cash on hand.

Cash flow forecasting: Unlike cash management, which focuses on current cash, cash flow forecasting is future-based. It predicts the timing and amounts of future cash inflows and outflows based on historical data, market conditions, and business activities. Accurate cash flow forecasting is crucial for strategic planning and helps businesses anticipate funding needs, avoid liquidity shortfalls, and make informed decisions about investments and expenditures.

Liquidity management: This is the practice of ensuring a company can meet its short-term obligations and continue operations without financial stress. It encompasses both cash management and cash flow forecasting, but also includes managing other liquid assets that can quickly convert to cash. Effective liquidity management ensures that a business maintains sufficient cash reserves or access to capital to handle unexpected expenses or opportunities.

By understanding and utilizing these three financial strategies, businesses can maintain a robust financial standing, ensuring they are well-prepared for both current needs and future challenges.

‍

Naomi Goldberg
5 min
Cash Forecasting
Cash flow statement vs cash flow forecasting

Luckily with a solid grasp of cash flow management, your company can meet operational needs and capitalize on growth opportunities. For the next several minutes, we’ll look at two action items that help maintain an advantageous capital supply: Cash flow statements and cash flow forecasting.

What is a cash flow statement?

A cash flow statement is a historical view of cash inflows and outflows over a specific period. Businesses use cash flow statements to help assess past performance, while data informs future strategies and ensures accurate financial records. 

What is cash flow forecasting?

Cash flow forecasting uses the company’s historical financial data to identify potential surpluses or shortages and adjust spending as necessary.  

Ultimately, cash flow statements and cash flow forecasting support daily operations as well as long-term growth and sustainability.

A cash flow statement offers a historical perspective on a company's cash movements, while cash flow forecasting anticipates future cash needs to guide strategic planning.

What’s included in a cash flow statement?

There are three main components of cash flow statements: operating, investing, and financing activities. Here’s a breakdown of each.

‍‍
Operating Activities

The operating activities section details the core revenue activities of a company, ie cash flows directly related to the production and sale of goods and services. Operating activities help gauge operational efficiency and profitability by specifying: 

  • Cash received from customers
  • Cash paid to suppliers and employees
  • Other operational expenses and income

The operating activities section allows you to assess the company's ability to generate positive cash flow in the short term, which is essential for maintaining liquidity to meet its obligations. 

Investing Activities

Investing activities capture cash flows related to the acquisition and disposal of long-term assets and investments—for example, new machinery, technology, or business acquisitions. Investing activities should also note any: 

  • Purchases of property, plant, and equipment (PPE)
  • Sales of long-term investments
  • Loans provided to or received from other entities

Investing activities help gauge how the company allocates resources for long-term growth. For example, are you spending more on acquiring assets or divesting? This provides insights into the strategic direction and potential future revenue streams. 

Financing Activities

The financing activities section highlights transactions with the company's owners and creditors to fund:

  • Proceeds from issuing shares
  • Repayment of borrowings
  • Dividend payments to shareholders

This section highlights the reliance on external financing, such as loans or issuing shares, and the capability to repay borrowings and distribute dividends. This section is pivotal for risk management as it indicates the company's ability to manage debt and inform financial risk strategies.

What are the types of cash flow forecasts?

There are several types of cash flow forecasting, all of which can enhance your company's financial planning and stability. Let's explore the three main types.

Scenario analysis is the creation of different financial situations based on potential events. It helps you understand how various occurrences—like economic downturns, market shifts, or changes in your business operations—might impact your cash flow. By evaluating best-case, worst-case, and most-likely scenarios, you can prepare more robust financial strategies. 

Rolling forecasts are dynamic and continuously updated. Unlike traditional static forecasts that cover a fixed period, rolling forecasts extend beyond this set timeframe. They adjust as new data comes in, providing a real-time view of future cash flows. This allows companies to be more agile and responsive to changing business conditions. 

Sensitivity analysis assesses the impact changing key variables have on your forecast. By tweaking variables like sales volume, cost of goods sold, or interest rates, you can see how sensitive your cash flow is to these changes. This method helps pinpoint the most critical factors affecting your financial health and supports more informed decision-making. 

What’s included in cash flow forecasts?

Cash flow forecasts should contain four main categories of information: expected income, projected dates for receiving that income, expected costs, and projected dates for when costs are incurred. More specifically, cash flow forecasts include:

  • Opening balance: The balance at the beginning of the forecast period 
  • Receipts: Income from sales, interest, and asset sales, broken down by item 
  • Total receipts: The total amount of receipts 
  • Payments: Expenses from materials, wages, marketing, and so on broken down by cash flow item 
  • Total payments: The total amount of payments 
  • Net movement: The difference between the total amount of cash a company receives (cash inflows) and the total amount of cash it spends (cash outflows) during a specific period, either by individual item or total 
  • Closing balance: The balance at the end of the forecast period 
  • Projected dates: The projected dates for when income will be received and costs will be incurred 
  • Non-sales income: Income from sources like tax refunds, grants, investments, and royalties

Cash flow forecasting is critical to several key areas of the business’s financial operations such as resource allocation, capital structure planning, and supporting growth initiatives. Here’s why: 

1. Resource allocation: By predicting future cash flows, businesses can allocate resources more effectively, ensuring that funds are available for operations, investments, and unexpected expenses. 

2. Capital structure planning: Accurate forecasts allow companies to plan their capital structure—balancing debt and equity—to maintain financial stability and minimize costs. For example, a forecast that highlights periods of high cash outflows might prompt a company to seek additional financing or adjust its debt repayment schedule. 

3. Supporting growth initiatives: Forecasting enables companies to anticipate growth needs and plan accordingly. This means ensuring that sufficient cash is available for projects, such as market expansion, R&D, and acquisitions, thus supporting long-term growth objectives

Real-life examples of cash flow forecasting & cash flow statements 

Before looking at what these two essential financial tools look like in real scenarios, here’s a recap of their definitions: cash flow statements are a historical view of where your money has been. Cash flow forecasting shows where your money will be. 

By combining these tools, you get a comprehensive picture of past performance and potential future outcomes, making it easier to plan for growth and navigate the complexities of the mid-market landscape. Let’s look into how cash flow statements and cash flow forecasts play out in the following scenarios:

  • New product launch
  • Seasonal market fluctuations 
  • Expansion into new markets 
  • Economic downturns

‍New product launch: Imagine your mid-market company launches a new product. The cash flow statement reveals the previous costs of similar product launches and the generated revenue.  With this information, you can use the cash flow forecast to predict future cash inflows and outflows, helping you plan for the necessary working capital and anticipate any shortfalls. 

Managing seasonal fluctuations: By examining cash flow statements, you can identify financial patterns during different seasons—higher sales in summer and lower in winter. Using this data, your cash flow forecast will cover expenses in off-peak times and make the most out of peak periods. 

Expansion into new markets: If your growth company is considering an expansion into new markets, cash flow statements can highlight how previous expansions impacted cash flow. Metrics like initial overheads, marketing spend, and time to breakeven are shown. Leveraging these insights in your cash flow forecast helps gauge the potential financial impact, thereby informing budget allocations and risk management strategies. 

Economic downturns: During economic downturns, historical cash flow statements can provide critical insights into how your company managed cash in previous crises. In this circumstance, forecasts will likely include strategies such as cutting non-essential expenses, securing lines of credit, or delaying capital expenditures for liquidity and operational stability.

Applying cash flow statements & forecasting to growth strategies

Effective growth planning hinges on cash flow statements and cash flow forecasting. Let's briefly touch on how these financial tools can be game-changers for your strategy. 

Managing expansion risks: Analyzing cash flow statements allows growth and mid-market companies to learn from past inconsistencies and make informed decisions to avoid similar pitfalls. On the other hand, cash flow forecasting helps you anticipate potential cash shortages and prepare contingency plans in advance. 

‍Optimizing Cash Reserves: Understanding your cash inflows and outflows through detailed cash flow statements sets the stage for optimizing cash reserves. This historical data can highlight periods of high liquidity, making a solid case for when to accumulate cash reserves. Forecasting takes this a step further by predicting future cash positions, enabling you to take proactive actions such as short-term investments or debt repayments during times of surplus. 

Financing Growth: Cash flow statements help you demonstrate financial health to potential investors and lenders by showcasing your ability to generate and manage cash effectively. To strengthen your pitch, cash flow forecasting projects how additional funds will be utilized and the expected returns. Together, they provide a compelling case for securing funding for expansion initiatives. 

By harnessing the insights from both cash flow statements and cash flow forecasting, businesses can navigate growth with greater confidence, ensuring a balance between aggressive expansion and financial management.

Quick tips for capital efficiency

You can achieve working capital efficiency by focusing on three areas: implementing working capital management across the organization, leveraging technology, and reviewing risk management policies. 

  1. Implementing working capital management across the organization‍

Make an organization-wide effort to consider the cost of working capital when making decisions. This ensures that each team understands its impact on working capital and is aligned with company goals. For instance, companies can use key performance indicators (KPIs) such as days sales outstanding (DSO) and days payable outstanding (DPO) to assess performance at different levels and departments. This allows the organization to track progress. 

  1. Leveraging technology‍

In 2024 and 2025, many companies will swap human-error-prone tools like Excel for advanced technology such as Machine Learning (ML) and predictive analytics to boost operational cash flow forecast accuracy. Utilizing real-time data and analysis within your tech stack allows the business to adjust liquidity, risk, and funding strategies to meet current or future demands. 

  1. Reviewing risk management policies‍

To get the most out of cash management solutions, review your risk management policies to ensure nothing slips between the cracks. Ideally, businesses review risk management policies at least once a year, though changing markets may necessitate more frequent reviews to address potential challenges.  

A better way to manage cash flow

Combining cash flow statements and forecasting allows you to assess past performance while predicting future financial health for better decision-making and resource allocation. This integration can help your business navigate uncertainties and seize growth opportunities effectively.

However, modern cash management faces several challenges.

  • Reliance on Excel: Using Excel for cash management can lead to errors and inefficiencies due to manual inputs and a lack of real-time data.
  • Poor Visibility: Limited visibility into cash flows can hinder a business's ability to make informed decisions, leaving them reactive rather than proactive.

Fortunately, solutions like Panax can significantly alleviate these challenges. 

Panax offers a comprehensive suite of tools designed to automate and streamline your cash management processes. With advanced features like customizable templates, automated data entry, and real-time updates, Panax removes reliance on cumbersome spreadsheets, reducing human error and streamlining your processes.  

Get in contact today to see how Panax can provide full visbility into your cash managementFor any business, understanding financial health is critical. In fact, 97% of CFOs make cash and liquidity management a key focus with many finding new ways to alleviate challenges such as relying on Excel or using tools with poor visibility into finances. 

Naomi Goldberg
5 min
Working Capital
What is working capital management?

Working capital is the difference between a company’s current assets (e.g., cash, inventory, accounts receivable) and current liabilities (e.g., accounts payable, short-term loans).

The formula is simple:

Working Capital = Current Assets – Current Liabilities

Working capital management is the process of managing these resources to meet short-term obligations and remain operational.

Simple Example:

Imagine a small retail business. Their inventory (current asset) is worth $50,000, while their accounts payable (current liability) sits at $30,000. Their working capital is $20,000. If they poorly manage accounts payable or overstock their inventory, they risk liquidity issues that could jeopardize daily operations.

Why businesses need to manage working capital effectively

Proper working capital management ensures financial stability. It’s a balancing act—too much working capital may suggest inefficiency, while too little can lead to liquidity crises. Effective management provides the flexibility to meet immediate financial obligations and invest in growth opportunities.

The link to cash flow optimization

Working capital management is inextricably tied to cash flow. By optimizing accounts receivable, accounts payable, and inventory, businesses can accelerate their cash conversion cycle (CCC)—the time it takes to convert investments in inventory into cash received from customers. Essentially, a shorter CCC means smoother cash flow.

Impact on profitability and liquidity

  • Profitability improves as funds tied up in working capital can be reinvested into high-ROI opportunities.
  • Liquidity reduces the risk of insolvency, ensuring the company can cover its short-term liabilities.

How it works

  1. Monitor assets and liabilities: track cash, accounts receivable, inventory, and accounts payable. 
  2. Analyze ratios: use ratio analysis to measure working capital management effectiveness.
  3.  Make decisions: use the information to make decisions about short-term spending and debt. 
  4. Improve processes: use software to automate processes like invoicing and payments. 

Types of working capital

To create financial strategies tailored to your business, it’s critical to understand the different forms of working capital:

  1. Permanent working capital 

Permanent working capital is funds that are consistently required to support basic operational needs (e.g., maintaining inventory). These funds remain constant irrespective of fluctuations in business activity levels and are vital for sustaining long-term operations. Properly managing permanent working capital ensures the business operates smoothly even during periods of economic uncertainty.

  1. Regular working capital 

These are funds needed to cover routine operational expenses in running a business. Regular working capital is critical to maintaining liquidity and meeting short-term obligations without disruption.

  1. Reserve working capital 

Reserve working capital is funds set aside to address unexpected expenses or financial contingencies due to unforeseen circumstances. Maintaining adequate reserve working capital safeguards the business against potential disruptions and assures operational stability under challenging conditions.

  1. Fluctuating working capital 

Fluctuating working capital requires careful planning and monitoring to effectively allocate resources during peak and off-peak periods. Proactively managing these variations helps prevent cash flow issues and supports business operations.

  1. Gross working capital 

Gross working capital refers to the total current assets available within a business, including cash, accounts receivable, inventory, and other liquid assets. By effectively managing gross working capital, the organization has sufficient resources to meet short-term obligations while enabling smooth operational processes.

  1. Net working capital 

Net working capital is the difference between a company's current assets and current liabilities, which indicates financial health. Maintaining positive net working capital is essential for meeting short-term liabilities and supporting day-to-day operations.

5 Key components of working capital

‍To streamline working capital management, businesses usually focus on the following  critical elements:

  1. Current assets

Current assets encompass resources a company can convert into cash within a short period, typically a year. These assets include i) cash and cash equivalents ii) accounts receivable, inventory, and iii) short-term investments. Managing current assets is crucial for maintaining liquidity while covering immediate financial needs. These resources allow businesses to manage operations seamlessly, respond to market demands, and support growth opportunities. Proper oversight and optimization of current assets directly contribute to a strong financial position. 

  1. Current liabilities

Current liabilities include i) accounts payable and ii) short-term loans, which represent the company's immediate financial responsibilities. Accounts payable refers to amounts owed to suppliers or vendors for goods and services already received, while short-term loans typically involve borrowed funds that must be repaid within a year. Correctly managing these liabilities is essential to maintaining the organization's financial health and smooth daily operations.

  1. Net working capital formula

Net Working Capital = Current Assets - Current Liabilities

‍Net working capital is a critical measure of a company's short-term financial health, operational efficiency, and liquidity. A positive net working capital means that the company has enough current assets to cover its current liabilities, meet financial obligations, and invest in growth opportunities. On the other hand, a negative figure could mean potential liquidity issues and necessitate immediate attention to protect the business’s stability.

What should be excluded from working capital?

Items that aren’t part of a company’s short-term assets or liabilities are not part of working capital and include: fixed assets (e.g. real estate and equipment that can’t be converted into cash within a year, long-term debt and lease obligations that go beyond a year, retained earnings or common stock, and patents and trademarks).

‍
Benefits of effective working capital management

Why should organizations prioritize working capital management? Read on for the key benefits: 

Improved cash flow & liquidity 

Effective working capital management ensures a steady and reliable cash flow, allowing organizations to maintain liquidity for operational needs and unforeseen expenses. By optimizing receivables, payables, and inventory levels, companies can reduce financial strain and avoid costly short-term borrowing. This proactive approach not only supports day-to-day operations but also provides flexibility to take advantage of strategic investment opportunities that power long-term growth and stability.

Better risk management 

Effective risk management is critical for mitigating financial uncertainties and safeguarding organizational stability. By analyzing potential threats and implementing robust contingency plans, companies can minimize the impact of adverse events on their operations. Proactive identification and evaluation of risks allow businesses to allocate resources strategically, reducing exposure to volatility.

This structured approach enhances decision-making processes and promotes resilience, ensuring sustained performance even in challenging market conditions.

Enhanced operational efficiency 

Streamlining processes, optimizing resource utilization, and reducing redundancies across the organization enhance your operations, improve productivity, and create better outcomes.Through working capital management, your business can create clear workflows and continuously monitor performance to align operations with strategic goals. This not only drives cost-effectiveness but also allows the company to quickly adapt to market demands for long-term success.

Stronger supplier & customer relationships 

Maintaining liquidity to meet its short-term obligations via working capital management means you’re making timely payments and fostering trust with suppliers. This reliability strengthens partnerships, leading to better negotiation terms and consistent supply chains. Similarly, optimized working capital enables businesses to offer favorable payment terms to customers, enhancing satisfaction and loyalty.

By balancing cash flow, businesses can create mutually beneficial relationships that support long-term growth and collaboration.

Challenges in managing working capital

While the benefits are clear, managing working capital is not without challenges:

  1. Cash flow constraints 

Insufficient liquidity can lead to missed growth opportunities or delayed payments. Businesses often struggle to balance incoming and outgoing cash, particularly when dealing with fluctuating sales cycles or unexpected expenses. Additionally, relying on credit or slow-paying customers can exacerbate these constraints, straining operational efficiency.

  1. Over-reliance on credit 

Excessive dependence on short-term financing can lead to high-interest costs. This can reduce financial flexibility and leave your businesses vulnerable during low revenue periods. Furthermore, it can create a cycle of dependency that hinders long-term growth and hampers the ability to invest in strategic initiatives.

  1. Inventory management issues 

Poor inventory management disrupts cash flow, as excess inventory leads to increased holding costs, while insufficient stock can damage customer relationships and diminish brand reputation. Balancing inventory levels is critical to ensure liquidity and maintain operational stability. 

  1. Accounts receivable delays 

Late payments from customers hinder cash flow and operational agility. These delays reduce the funds needed for day-to-day operations and strategic investments. Prolonged payment cycles may also increase reliance on external financing, raising borrowing costs and financial risk.‍

Strategies for working capital management

‍To overcome these challenges, CFOs and treasurers can adopt some of the following strategies:

  1. Cash flow forecasting & budgeting 

Anticipate future cash needs to avoid shortfalls or surpluses. Tools like cash flow software can streamline projections. Regularly updating cash flow forecasts to align with changing market conditions and organizational priorities, for better decision-making. 

  1. Inventory control techniques 

Implement just-in-time (JIT) or ABC analysis to maintain optimal inventory levels. These methods minimize holding costs and reduce the risk of obsolescence while ensuring that stock levels meet demand. Regular inventory audits and leveraging software solutions can further enhance efficiency and accuracy in inventory management.

  1. Streamlining accounts receivable & payable 

Encouraging faster customer payments by offering early payment discounts, which improve cash flow and reduce outstanding receivables. Additionally, negotiating extended payment terms with suppliers gives you more financial flexibility and improved management of accounts payable.

  1. Leverage financial tools & technology 

Use automated solutions like supply chain finance platforms and electronic invoicing to improve efficiency. These tools streamline payment processes, reduce errors, and provide real-time insights into cash flow, fostering more informed decision-making.

Differences between related concepts

‍Lastly, it’s crucial to disentangle working capital management from related concepts:

Working capital vs. cash management 

Working capital compares current assets to current liabilities to understand whether the finance team can pay bills and other short-term liabilities. Cash flow measures the cash inflows and cash outflows, as shown in the cash flow statement. 

Working capital vs. capital budgeting 

Capital budgeting focuses on long-term strategic investments, while working capital management is concerned with the short-term, operational aspects of managing a company's current assets and liabilities.

Take control of your working capital today

Working capital management isn’t just a financial principle—it’s the backbone of operational efficiency and business growth. For CFOs, VPs of Finance, Controllers, and Treasurers, understanding and implementing these strategies is vital for maintaining liquidity, optimizing cash flow, and securing a competitive edge.

Find gaps in your working capital strategy? Prioritize stronger relationships with suppliers, streamline receivables, and harness the power of automation to elevate your game. A balanced working capital approach today can fuel unprecedented growth tomorrow.

Naomi Goldberg
10
Cash Management
Cash flow management survey 2025: The results are in

To get more insight into the state of AI and automation in cash flow management in 2025, we commissioned a survey of 200 senior finance professionals. Its purpose is to shed light on their current methods, challenges and priorities.

This report was administered online by Global Surveyz Research, an independent global research firm. The survey is based on responses from CFOs, VPs Finance, Directors/Heads of Finance, Controllers, and Treasurers across a mix of industries including tech, E-commerce, real estate, asset- based companies, hospitality, and manufacturing.

Survey participants hailed from companies with an ARR of $50M+ and treasury departments that include 4+ people (25%), 1-3 people (25%), or no treasurers (50%), in the US, UK, DE/FR, and MEA.

What the survey found: Increasing pressure on finance teams to improve efficiency, but continued caution about adopting AI solutions 

The survey revealed that 33% of respondents faced internal operational risks, such as fraud or system breakdowns, over the past year. Additionally, 32% highlighted regulatory constraints, while 27% cited debt obligations with near-term maturities as significant challenges. This convergence of internal and external pressures is compelling organizations to rethink their approach to cash flow management.

To stay resilient, finance teams are focusing on achieving real-time visibility and implementing proactive measures to mitigate risks before they escalate.

According to the survey, areas such as audit and compliance, expense management, transaction categorization, and cash flow forecasting were rated equally as high priorities for AI implementation. These technologies are streamlining traditionally labor-intensive processes, enhancing accuracy, and freeing up valuable resources.

Larger enterprises, in particular, find AI indispensable, as its ability to process vast transaction volumes reduces the burden on finance teams and allows them to focus on strategic decision-making.

The adoption of AI is not without its challenges. Concerns around cost, regulatory compliance, and data reliability remain top of mind for many finance teams. However, the benefits of automation—from error reduction to improved forecasting capabilities—are undeniable. By investing in scalable, AI-driven solutions and prioritizing data quality, companies can future-proof their operations and ensure they are prepared to navigate an increasingly complex financial landscape.

As the 2025 survey highlights, embracing innovation is no longer optional for finance teams. By leveraging AI to overcome liquidity challenges and optimize operations, organizations can transform their cash flow management processes and secure a competitive edge in an era of rapid change. 

Download the full survey report here. 

Naomi Goldberg
5
Cash Management
What controllers need to know about treasury management in pre-treasury teams

At growing companies, or companies with lean finance teams without a dedicated treasury function, controllers often find themselves wearing multiple hats. Without a dedicated treasury team, the responsibility of treasury management often falls on their shoulders. This expanded role requires controllers to not only excel in traditional financial functions but also to master the complexities of managing liquidity, mitigating risks, and ensuring financial stability.

Here’s what controllers in lean pre-treasury teams need to know about taking ownership of treasury management:

Juggling complex treasury operations, with lean resources

Without a dedicated treasury team, controllers must take charge of several critical treasury functions:

  • Cash Management: Ensuring the organization has sufficient liquidity to meet short-term obligations while avoiding excessive idle cash. This involves cash flow forecasting, tracking accounts receivable and payable, and optimizing cash reserves.
  • Risk Management: Identifying and addressing financial risks, including currency fluctuations, interest rate changes, and credit risks. Controllers may need to implement basic hedging strategies and stay vigilant about market trends.
  • Debt Management: Managing loans, credit lines, and other forms of debt effectively, balancing costs and flexibility while ensuring compliance with loan covenants.
  • Investment Management: Making decisions about surplus funds to maximize returns while maintaining liquidity and mitigating risks.

Understanding and taking ownership of these functions empowers controllers to ensure the organization’s financial health in the absence of a treasury team.

Prioritizing cash flow visibility

For controllers handling treasury responsibilities, cash flow visibility is paramount. Accurate, real-time insights into cash positions enable controllers to:

  • Identify and address liquidity gaps.
  • Plan for short-term financing needs.
  • Optimize working capital.

Leveraging tools like cash management systems and enterprise resource planning (ERP) software can provide controllers with a consolidated view of cash across accounts, currencies, and business units. This visibility is crucial for effective decision-making.

Utilizing technology as a resource to work more efficiently

Controllers in lean teams must rely on technology to handle treasury tasks efficiently. Key tools and innovations include:

  • Treasury Management Systems (TMS): Automating processes like cash forecasting, payment approvals, and risk assessments to reduce manual work and enhance accuracy.
  • Robotic Process Automation (RPA): Streamlining repetitive tasks such as bank reconciliations and cash position reporting.
  • Artificial Intelligence (AI) and Machine Learning (ML): Using AI and ML for predictive cash flow analysis, fraud detection, and scenario modeling.

These technologies not only save time but also help controllers manage treasury responsibilities effectively, even in lean setups.

Mitigating financial risks without dedicated resources

Managing risks becomes more challenging without a dedicated team, but controllers can still establish effective practices:

  • Develop straightforward policies for managing foreign exchange and interest rate risks.
  • Stay informed about regulatory requirements to ensure compliance.
  • Utilize basic hedging techniques or financial products to mitigate risks where appropriate.

Controllers should also focus on regular reporting and analysis to monitor risk exposure and adjust strategies as needed.

Collaborating across functions

In lean organizations, collaboration is essential. Controllers must:

  • Work closely with finance and operations teams to gather relevant data.
  • Align treasury responsibilities with broader financial goals.
  • Communicate regularly with executive leadership to ensure transparency and alignment.

Collaboration helps bridge resource gaps and ensures that treasury management is integrated into the overall financial strategy.

Ensuring regulatory compliance and strong governance

Even in lean teams, compliance cannot be overlooked. Controllers must:

  • Stay updated on tax regulations, financial reporting standards, and anti-money laundering (AML) requirements.
  • Implement strong internal controls to prevent fraud and errors.
  • Use technology to streamline compliance tasks and ensure accuracy.

By focusing on governance and compliance, controllers can safeguard the organization’s financial integrity.

Balancing strategic and operational roles

Controllers managing treasury functions must balance day-to-day operations with strategic planning. This includes:

  • Evaluating short-term and long-term financing options.
  • Planning for growth initiatives, such as capital investments or expansions.
  • Assessing the financial implications of key business decisions.

By adopting a strategic mindset, controllers can contribute to the organization’s financial success while managing immediate treasury needs.

Adapting to dynamic financial environments

Economic and market changes can pose significant challenges for treasury management. Controllers in lean teams must:

  • Monitor macroeconomic trends and their potential impacts.
  • Adjust strategies in response to changing interest rates, inflation, or currency fluctuations.
  • Build contingency plans to address unexpected disruptions.

Adaptability and proactive planning are crucial for navigating an ever-changing financial landscape.

Supporting controllers in pre-treasury teams to manage complex treasury operations

Panax is designed for lean teams with complex treasury needs, so it is a perfect tool for controllers who need to manage treasury. Panax utilizes automation and AI to reduce manual work and increase strategic insights, so controllers can have full visibility over all of their cash. Panax makes cash forecasting and budgeting easy, even without a dedicated team. Panax generates reports so that controllers can get a bird’s eye view of their cash situation, but also deep dive into specific entities or currencies, so they can avoid cash risks and optimize liquidity. Get a Panax demo here. 

Naomi Goldberg
10
Platform
Cash Management
Panax AI
Connectivity
Security
Resources
Blog
Case Studies
FAQs
Library
Company
About Panax
In the News
Contact us
Careers
Careers
Platform
Product
Cash Management
Announcements
Case study
Security
Resources
Product
Blog
Announcements
Case study
Company
About us
In the News
Contact us
Careers
Terms & conditions
Privacy policy
We use cookies to recognize you, remember your preferences and tailor your use of our website. Information provided by cookies can help us analyze your use of our website and provide you with a better user experience.
Learn more
Cookie settingsAllow all
Get a Demo
We'd love to show you how Panax can help
Thank you
for you request!
Ok
Oops! Something went wrong while submitting the form.