Forecasting cash flows and their movement is necessary for every company, since this process is a marker showing the approximate earnings possible in the near future. Cash Flow Forecasting can be a hint for further investment of funds.
If we talk about forecasting free cash flow, then this is a fairly serious part of business development. This is one of the most important indicators of the financial component of the company, its promotion in the near future.
Adequately assessing the forecast of free cash flow, you can form an opinion on how solvent the company is, if it has funds to pay off debt or credit obligations, as well as the ability to invest in new financial projects.
Forecasting free cash flows can be done in several ways:
- forecasting profits from the sale of goods;
- receipts from subsidiaries;
- working capital correction indicator.
Here are the most commonly available methods. When using them, you should remember that when forecasting free cash flows, you can make mistakes and inaccuracies, since this area has not been fully studied.
How to Properly Forecast Cash Flows
This method is widely used by companies of various sizes to make preliminary calculations of future income and expenses. Forecasting helps a businessman to run a business competently and rationally, manage financial flows, prudently distribute funds, avoiding overspending and burdening the business with loans.
The company’s cash flow depends on three main sources:
- operating. These are funds received by the company after operating activities (capital expenditures are not included here);
- monetary. These funds are used to repay loans, debts and finance current or new projects;
- investment. This formulation refers to investments in acquisitions, assets, equipment, etc.
To forecast the financial condition of a company in the future, you can use monitoring of sales patterns and cash flow. Having an understanding of these two components, you can clearly track how profitable the company is and what needs to be done to improve the situation.
