Software Project Management - Old Questions

6. What do you mean by cash flow forecasting?

Answered by Anonymous

Cash flow forecasting, also known as cash forecasting, is a way of estimating the flow of cash coming in and out of your business, across all areas, over a given period of time. A cash flow forecast shows your projected cash based on income and expenses and is an important tool when it comes to making decisions about activities such as funding, capital expenditure and investments. Cash forecasting can be carried out for a range of time horizons. Short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or excess cash in the immediate term. A medium-term cash flow forecast may cover between one month and one year ahead, while a long-term forecast will be used to look at sales and purchases further into the future – between one year and five years ahead or even longer, depending on the nature of the business. The longer the time horizon of a cash flow forecast, the less accurate it is expected to be. Cash Flow has many uses in both operating a business and in performing financial analysis. In fact, it’s one of the most important metrics in all of finance and accounting. The most common cash metrics and uses of CF are the following:

a) Net Present Value – calculating the value of a business by building a DCF Model and calculating the net present value (NPV) b) Internal Rate of Return – determining the IRR an investor achieves for making an investment c) Liquidity – assessing how well a company can meet its short-term financial obligations d) Capital Expenditures – CF can also be used to fund reinvestment and growth in the business