Methods of Cash Flow Forecasting

There is no way to overemphasize the importance of cash flow estimates in a company's finances. When executed properly, a cash flow analysis will accurately predict your company's financial liquidity for the next three, six, or even twelve months.

Peaks and valleys will not make you negligent, you will be in a better position to budget your funds, and you will have a good idea of whether the projected income will cover your costs.

In essence, forecasting your cash flow assets is the best way to measure the financial health of your company and to diagnose any potential illness in the coming quarter.


While "cash" usually refers only to liquid assets, the estimated cash flow relates to overall financial management, in particular, the reduction of short-term debt from a combination of your liquid assets and short-term investments.

There are several methods of estimating cash flows: direct and indirect. Check each one to determine which is the best fit for your company.

Direct cash flow forecasting

The direct method – also known as the Receipt & Payment method – is based on actual data consisting of receipts (sales to customers, asset sales, etc.) and disbursements (trade payables, salaries/labor, etc.).

Because it is based on real figures, the direct cash flow forecasting method is best suited for short-term, one week to one financial quarter estimates. (And, in rare cases, up to one year.) For most companies, the direct method is the best choice for internal evaluation.