How to predict your future cash: cashflow projections vs cashflow forecasts

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Keeping in control of your cash is far easier when you use cashflow projections to steer the course of your business. To manage your cash effectively you need to move beyond just using historic numbers and start extrapolating your cash data forward in time.

But there are different ways to create and analyse this future view of your cash position, as well as different business reasons for doing so.

In this post, we’ll give you the lowdown on the differences between a cashflow projection and a cashflow forecast – with tips on which tool best fits the specific needs of your financial management.

The need for a future view of your cash

82% of US small business failures are attributed to poor cashflow, according to research by U.S. Bank, with many business owners having a poor understanding of their overall cash position.

When cash is so central to the longevity of the business, you want to be able to avoid any potential cashflow threats. Being able to predict, review and avoid the possible threats to your cash position is a huge benefit – and gives you the insights you need to take proactive action.

Moving your cashflow into a practical reality means having the tools at your disposal to provide this ‘crystal ball’ view of the cash path. And this is where forecasting, scenario planning and cashflow projections come into play.

In short, they show you what’s coming down the road so you can take the relevant action.

Working with cashflow forecasts and budgets

A cashflow forecast takes your historic actuals – the transactional data in your accounting system – and uses this information to forecast a future cash position, whether that’s a month, a quarter or 12 months further down the line.

As such, a forecast takes your current cash position and makes the best informed prediction of how your cashflow will look at a future date. It’s also closely linked to your budget for the year – where you’ll have planned the revenues, costs and expenses over the period and will have set targets to measure the company’s financial performance.

Using cashflow projections to scenario-plan your cash

A cashflow projection is different to a forecast in one key way. Whereas a forecast is your prediction of the most likely future cash outcome, a projection will take an alternative scenario, or an assumption about your future position, and will add this into the equation.

Projections are a way to take a hypothetical scenario – such as an increase in your prices, or an increase in payroll overheads – and to then work this assumption into your future cashflow prediction. The output is still based on your key historic data, but with the additional variable of this hypothetical assumption.

Being able to run multiple projections gives you a way to model both an ideal scenario and a worst case future cash position. As such, cashflow projections are incredibly useful when running scenarios, brainstorming financial ideas and looking at strategic changes in the business – allowing you to gain a more informed overview of these potential outcomes.

Combining the power of forecasting and projections

Using both predictive cashflow techniques together gives you the most rounded and robust future view of the company’s cash position.

In the first instance, you can run a cashflow forecast to get a more detailed view of the most likely future cashflow scenario. By then running additional projections – perhaps the best and worst case scenarios – you can scenario-plan each eventuality and plan accordingly.

Cashflow forecasts and projections are two different tools to use, but when combined they provide the best possible way to keep your cashflow on track.

Check out Fluidly’s smart cashflow forecasting and projection tools