Cash Flow Forecasting

This chapter covers forecasting of cash flows, which is one of the most underrated yet critical aspects of a company's operations, and the Treasurer is the vortex of the entire process. The eventual objective of cash flow forecasting is to determine funding requirements and liquidity usage and planning to ensure minimal borrowings and maximum utilisation of the firm's cash. It would reduce cost of capital and hence expenses and would increase returns on excess cash. Direct methods for cash flow forecasting build a bottoms-up approach to forecasting and are more likely to be used for short-term horizons. Such methods are used more to generate definitive and tangible cash flows rather than to predict the future. Indirect methods use a top-down approach that rationalises cash flows from medium-to long-term projections and arrives at estimated cash flows.