Cash flow forecasts depict the consequences of various expenditures, allowing managers to monitor organizational performance and determine the financial viability of a project or task. Such forecasts detail the projected inflow and outflow of cash in a business during a specific period of time. These forecasts are important in assessing the financial flexibility, liquidity, risk and profitability of an organisation. Cash flow forecasting tools allow managers to prepare future budgets
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System diagrams, also called network diagrams, are graphical representations of systems/processes and their elements. These diagrams show cash inputs and their sources, cash outputs and their recipients, and the dependencies among them. System diagrams are either prepared as standalone cash flow forecasting tools or used in conjunction with spreadsheets and pro forma cash flow statements.
Spreadsheets are the simplest and most effective cash flow forecasting tools. They are typically used to model and quantify relationships shown by system diagrams. A cash flow forecast is commonly prepared as a table with appropriate column and row headings. Columns represent time periods (week, month or years) while rows depict cash flows, such as sales costs and other expenses. Individual cells are then filled with appropriate values, and calculations are made. A spreadsheet cash flow forecast allows managers and other stakeholders to analyse the effect of changing factors on individual values.
Pro Forma Cash Flow Statement
According to Linda Pinson in the book, "Anatomy of a Business Plan: The Step-by-Step Guide to Building Your Business Plan," a pro forma cash flow statement is one of the principal forecasting tools used in business. It deals specifically with cash transactions and does not include amortisation, depreciation and other non-cash items. Pro forma cash flow statements are used exclusively for internal planning to determine how much cash will flow in (cash receipts) and flow out (cash payments) for a business during a specific period of time. Examples of cash receipts include revenues, interest and proceeds of the sale of assets, while cash payments include the cost of salaries, programs, meetings/special events, travel expenses, marketing and other activities. A pro forma statement also includes long-term payment of assets, loan and mortgage payments and interest expense.
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