Short-term cash flow forecasting is a critical tool that FP&A analysts use to assess near-term liquidity and reduce the risk of disrupting operations.

Certain industries and business models are naturally cash intensive and require strict management of cash balances while others might utilize lines of credit more frequently.

Whatever the case may be, prudent management of cash balances ensures a company stays healthy. 

Understanding how to interpret a short-term cash flow forecast is just as important as understanding how to build one.

In this FAQ, we will cover what a short-term cash flow forecast is, why it is important, and how to build one. 

What Is a Short Term Cash Flow Forecast?

A short-term cash flow forecast is a predictive model that attempts to estimate cash inflows and outflows over a period that is typically less than 12-months.

Often, short-term cash flow forecasts are for even shorter periods, depending on the importance of maintaining sufficient cash balances. 

One principle of short-term cash flow forecasts is that the shorter the period, the more accurate the forecast is. For this reason, 12-month cash flows are often broken into shorter periods, like quarterly or monthly, and then broken down further by weekly or bi-weekly periods. 

The beauty of short-term cash flow forecasts is that they can be integrated into the long-term cash flow forecast so that the entire predictive model is more comprehensive. 

Why Are Short-Term Cash Flow Forecasts Important?

In the business world, cash is king, and understanding the relationship between GAAP or Accrual Accounting practices and cash flow is extremely important.

The process of constructing a cash flow forecast helps to illuminate how the business translates net income into cash.

One of the most important aspects of any cash flow forecast is that it identifies weaknesses in the revenue cycle and helps to assess if collection policies need to be revised. 

Among the many benefits of constructing a short-term cash flow forecast, one sticks out above all else: assessing near term liquidity.

This is critical because cash is used to fund operations, pay employees, taxes, and other obligations. Understanding near-term liquidity is essentially for ensuring there is no disruption to the business’ operations. 

Another key benefit of building short-term cash flow forecasts is that they illuminate cash flow issues before they arise but with sufficient time to make prudent adjustments in labor or supply chains to mitigate risks.

Understanding near-term cash demands also helps to avoid conflicts with vendors and regulatory agencies.

Cash flow is critical for all businesses, even profitable organizations can find themselves facing serious issues when they are forced to draw on credit too much.

How to Build a Short-Term Cash Flow Forecast

Building a short-term cash flow is fairly straightforward and can be done in largely the same way as a long-term cash flow forecast. 

The process is simple enough to implement in small organizations but is robust enough to be used in large businesses.

Here are the steps needed to build a short-term cash flow forecast.

Determine The Timeframe To Forecast

Start off by defining the period you want to forecast. For a short-term cash flow, choose a period that is 12 months or less.

One aspect of building weekly cash flow forecasts is that they can be compiled into monthly, and monthly into quarterly.

In this way, starting with small time frames has the benefit of being able to aggregate into larger time frames with little effort. Whatever the timeframe you choose, be sure you select a timeframe that will allow you to gather ample information. 

List All Cash Expected Cash Receipts

For the time period you have selected, include every source of cash and the amount you expect to receive and when.

Begin this process with sales, which can be pulled from historical data or fiscal budgets, and progress towards sources of cash unrelated to income. These might include tax refunds, vendor rebates, equity infusions, royalties, or receivables.

It is important to include payables and any budgeted amounts for the period that might include planned capital expenditures, taxes due, and amounts owed for any non-regular business activities. 

List All Expected Cash Expenditures

Similar to listing the cash receipts, make a list of all items that you expect to spend cash on for the period and the date you expect to make the cash outlay.

Begin with fixed expenses like rent, wages, cost of goods sold, and progress towards variable expenses.

Calculate Your Cash Flow

First, identify your beginning cash balance in the forecast. It is recommended to tie this balance to a bank statement to ensure the utmost accuracy.

For each period you want to forecast, add your expected cash receipts to your beginning balance for the period and reduce it by the expected cash expenses for the same period.

The ending balance will become the beginning balance for the next period.

For example, if you are projecting cash for one week you would add cash receipts to your beginning balance for the week, subtract that week’s cash expenses, and the ending cash balance would become the beginning balance for the following week. 

Using Datarails to Build Your Short Term Cash Flow Forecasting

Every finance department knows how challenging building a short-term cash flow forecast can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.

Datarails is an enhanced data management tool that can help your team create and monitor budgets faster and more accurately than ever before.

By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.

This takes budgeting from time-consuming to rewarding. 

Learn more about the benefits of Datarails here.