What is cash flow forecasting?

Finance teams are required to forecast cash for multiple reasons:

• Staying ahead of upcoming inflows and outflows and preventing a potential short fall of cash 
• Identifying opportunities of excess cash that can be invested and gain interest 
• Contingencies/requirements from investors or banks

But despite the fact that forecasting is a critical tool in financial planning, many organizations struggle to get it right.

Common challenges include data inaccuracies, time-consuming manual processes, and the reliance on outdated methods. These issues can lead to unreliable forecasts, making it difficult for businesses to plan for the future, manage cash flow, and mitigate risks effectively.

Panax's forecast feature is designed to address these challenges head-on, providing businesses with a powerful tool to navigate their financial future with confidence.

Cash forecasting with the Panax platform

Panax’s forecast capability allows our customer to build a monthly forecast. The goal is to allow our customers to foresee their expected inflows and outflows and the expected balance, so they can maintain control and make data-driven decisions. The forecast can either be built at a company level or per entity and then aggregated to a company level.
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Why forecast with Panax? 

• Accuracy - Panax connects to all your banking data, providing an easy and automated way to base your forecast on historical data and future ERP data. This allows you to easily and more accurately plan future inflows and outflows.
• Automation - We generate the forecast automatically each month by rolling your forecast based on your input assumptions and updated actuals. 
• Bottom up and customized - We allow you to create forecast methods based on your knowledge of the cash flow. Each category can be configured per your understanding and adjusted to your needs.
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How Panax forecasting works

Initial setup

First, define a forecast method. This will determine how the forecast is populated. You can choose between a few different methods:

1. ERP-based - If you have an ERP connected to Panax, you can pull your expected invoices from the ERP and place the total amount as a forecast for the time period they apply to. You can then layer on additional forecast methods for the following months, from additional sources of data. 

2. Recurring amount - Input an amount that repeats monthly. You can also add a formula to increase/decrease the amount month-over-month.

For example, if your office and rent expenses are $120,000 you can input that amount. It will be populated throughout each month of the forecast for that category. 

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3. Based on historical data - By bringing in all your actuals, you can rely on the historical behavior of a certain category to build a forecast. This will be based on the average over a certain period, the growth rate over a certain period, or on your annual growth rate.

For example, if your sales are seasonal, you can build the forecast for your collectionsit to be based on the same month last year’s month sales + add a growth rate.

4. Based on data from another category - You can also rely on amounts from other categories, which means your forecast can be calculated as a % of that category. 

For example, if your shipping expenses are 3% of last month’s collection, you can add that method point to last month’s collection. Panax will populate the forecast for shipping, based on the forecast for collection.

5. Manual input - You can also manually define an expected amount per month and use that as you forecast. 

For example, if your marketing spend is based on a plan you receive from the marketing team, you can just input the spend manually per month.

Actuals vs. forecast 

When the month ends, we will automatically roll the forecast and create a new version that is based on the updated actuals. You will see an end-of-month summary that compares this current  month actuals vs. forecast: 

Based on this summary you can adjust and optimize your forecast for the following month. 

Reporting and analytics

Use the variance report to review what was forecasted for a specific month in a previous months version of the forecast vs. what you are forecasting now. For example, if in May your forecast showed the Closing balance in July to be at a certain amount and then in June the forecast was updated and now the closing balance for July shows a lower amount, you can drill down into the inflows and outflows to better understand what in the actuals / forecast was changed that caused that difference. 

By leveraging the variance report, you can:

1. Identify Discrepancies: Quickly pinpoint where and why discrepancies between forecasts occur, whether due to changes in revenue, expenses, or other financial factors.
2. Improve Accuracy: Use insights from the variance analysis to adjust your future forecasts, making them more accurate and reflective of real-world changes.
3. Enhance Decision-making: Gain a deeper understanding of your cash performance, allowing for more informed strategic decisions and proactive liquidity management.
4. Increase Accountability: Track and explain variances to stakeholders, ensuring transparency and accountability in your forecasting process.

Learn more about Panax forecasting and how automation can help you do your job better.

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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.

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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. 

2. 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. 

3. 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. 

When it comes to running a business, forecasting cash flow is an essential practice. Cash flow forecasting involves predicting the amount of money that will flow in and out of your business over a specific period. By mastering cash flow forecasting, you can better predict future cash positions, avoid potential shortages, and effectively utilize surpluses, ensuring smooth financial operations for your business. This allows you to anticipate any potential shortfalls and plan accordingly. 

In this article, you’ll learn steps and practical tips for forecasting cash flow accurately using Excel. Let’s dive in.

The importance of managing cash flow

Understanding and managing cash flow is crucial  for several reasons, as it:

‍Ensures Liquidity: A cash flow forecast helps ensure you have enough cash on hand to meet your obligations like payroll, supplier payments, and other operational expenses.

Supports Decision Making: Accurate forecasting allows you to make strategic decisions about investments, expansions, or cost-cutting measures.

Avoids Surprises: By predicting cash flow, you can avoid unexpected shortfalls that could harm your business operations.

Builds Confidence: Providing clear cash flow projections can build confidence among investors and lenders, demonstrating that your business is well-managed and sustainable.

A good cash flow forecast acts like a financial weather report for your business, helping you prepare for sunny days and navigate through storms

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Step-by-Step Guide to Creating a Cash Flow Forecast

Creating a cash flow forecast might seem daunting, but breaking it down into manageable steps makes it easier to handle. To help you get started, we've outlined a simple, step-by-step guide to forecast your cash flow. 

1. Determine the Forecasting Period

‍Decide whether you want a weekly, monthly, 13 week or 1 year forecast. A shorter period (e.g. weekly) provides more precision for immediate decisions, while longer periods (e.g. quarterly) are better for strategic planning.

2. Choose Between Direct and Indirect Methods‍

For short-term accuracy, use direct forecasting by tracking cash receipts and payments. For longer-term, strategic forecasting, use the indirect method, which leverages financial statements like income statements and balance sheets.

3. Forecast Your Income or Sales 

‍Begin by deciding which period you want to cover, whether it's weekly, monthly, or quarterly. Look at past sales data to identify trends and make educated guesses about future sales. For new businesses, estimate your sales based on market research and potential customer base. 

4. Estimate Cash Inflows 

Consider other potential sources of cash inflows beyond sales. This includes loans, asset sales, GST rebates, or additional investments from owners. Adding these to your forecast provides a complete picture of incoming cash. 

5. Estimate Cash Outflows and Expenses

List all expected cash outflows, such as the costs required to make goods available, operational expenses, salaries, rent, utilities, and any other regular business expenses. Don't forget to include irregular expenses, like annual subscriptions or one-off purchases. 

Subtract the net outgoings from the net income for each period to determine your cash flow, which can be either positive or negative.

6. Create a Running Total

Next, you'll want to maintain a running total over time. This involves keeping a cumulative account of your cash flow. Essentially, at the end of each period, you will add or subtract your net cash flow from the previous period’s closing balance. 

How to Create a Cash Forecast with Excel

Excel is a powerful tool for creating cash flow forecasts, thanks to its versatile functionalities. Here are some key functions and features that will help you build an accurate, effective cash flow forecast: 

SUM Function: Use this to aggregate your cash inflows and outflows, providing a quick total for specific periods.

IF Function: This helps create conditional scenarios. For example, if a certain condition is met, a specific outcome is displayed.
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VLOOKUP/HLOOKUP: These functions are useful for retrieving data from different tables or sheets, allowing for dynamic references and more streamlined calculations.
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CHARTS: Visual representations such as bar charts or line graphs can help you identify trends in your cash flow over time, leading to better decision-making.
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DATE : Functions like EDATE and EOMONTH are useful for handling date-specific calculations, increasing timing accuracy in your forecasts.
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DATA VALIDATION: Use this feature to restrict the type of data or values you can enter in a cell, ensuring that your cash flow model remains consistent and error-free.
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PIVOT TABLES: Simplify large datasets by summarizing your cash flow data, making it easier to analyze and interpret your financial information.
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CONDITIONAL FORMATTING: Highlight specific cells based on conditions (such as cash inflow less than a threshold), making it easy to identify potential issues.
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GOAL SEEK: This feature can help you determine the necessary input values to achieve a specific financial goal, such as a targeted ending cash balance.

By leveraging these Excel functions and features, you can create a comprehensive and reliable cash flow forecast tailored to your business needs.

Limitations of Using Excel in Cash Forecasting

Although many businesses use Excel in their cash management because of its accessibility and flexibility, it presents a number of limitations, including: 
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‍Manual Data Entry that’s prone to human error: Entering data manually into Excel is not only time-consuming but also prone to human error. This can compromise the accuracy of your cash flow forecasts.

‍Lack of Automation: Excel lacks built-in automation features, making it difficult to update and sync your data efficiently without extensive manual effort.

‍Difficulty scaling as the business grows: As your business grows, managing larger datasets and complex financial models in Excel becomes increasingly cumbersome, hindering scalability.

‍Limited Reporting: Creating customized and dynamic reports in Excel can be challenging, often requiring advanced knowledge of formulas and pivot tables.

‍No Real-Time Collaboration: Excel does not facilitate real-time collaboration, making it hard for multiple team members to work on the same cash flow forecast simultaneously.
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‍‍5 Tips to Improve Your Cash Flow Forecasting

Accurate cash flow forecasting isn’t just about crunching numbers. It’s about understanding the ebbs and flows of your business and utilizing key strategies to anticipate future financial needs. Here are five essential tips that can enhance your cash flow forecasting: 
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Regularly Update Your Forecast

Cash flow forecast is not a set-it-and-forget-it document. Revisit and revise your forecast frequently to reflect any changes in income, expenses, or external economic factors. The more current your forecast, the more reliable your financial planning will be.

Use Historical Data Wisely

Employ past financial data to identify trends and patterns in your cash flow. This historical perspective can inform more accurate projections. However, remember that past performance isn’t always indicative of future results, so consider any anticipated changes in market conditions, seasonal fluctuations, and business growth.
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Incorporate Multiple Scenarios

Plan for the best, worst, and most likely financial scenarios. This approach helps you prepare for unexpected changes and develop contingency plans. By modeling different outcomes, you can better navigate through uncertainties.
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Monitor Key Metrics

Keep an eye on critical financial metrics like accounts receivable turnover, inventory turnover, and accounts payable days. These metrics can offer insights into your cash flow health and highlight areas where you might need to adjust your strategy.
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Communicate with Stakeholders

Effective cash flow management like cash flow monitoring often involves multiple departments and stakeholders. Maintain open communication with your finance team, suppliers, and customers. Their input can provide valuable insights and help you make more informed decisions.

Improving your cash flow forecasting is an ongoing process that requires diligence and adaptability. By following these tips, you can create a more accurate and responsive forecast, ensuring your business stays financially healthy and prepared for the future.

Done Right, A Cash Forecast Can Be One of Your Most Impactful Tools

Mastering the art of cash flow forecasting is crucial for every business, regardless of its size or industry. Ultimately, a well-prepared cash flow forecast is not just a chart filled with numbers—it's a strategic system that empowers you to navigate the financial future of your business confidently.

While Excel is a powerful tool, it has its limitations, especially when it comes to managing and updating extensive cash flow data. This is where cloud-based solutions with real-time, cash account updates come in. These solutions provide more dynamic, user-friendly, and automated features to enhance your forecasting accuracy and efficiency. 

With Panax, you can revolutionize your cash flow forecasting by leveraging powerful features such as: 

Real-time Updates: Unlike static Excel sheets, Panax offers real-time data synchronization, ensuring your forecasts are always up-to-date.
Automation: Automate repetitive tasks and reduce manual errors with intelligent automation features, saving you valuable time.
Advanced Analytics: Gain deeper insights into your cash position with powerful analytics and visual dashboards that Excel simply can't match.
Scenario Planning: Easily create and compare multiple scenarios to prepare your business for various financial situations.
Accessibility: Access your cash flow forecasts from anywhere, anytime, with cloud-based storage and security.

By incorporating Panax into your financial toolkit, you're not just overcoming Excel's limitations; you're setting a new standard for your business's financial health, ensuring you're always a step ahead in your cash flow management.
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Contact us today to see how Panax can take your cash fore forecasting forward.

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