What Are The Two 2 Main Types of Cash Flow Forecast?

You maybe trying to decide on the right type of cash flow forecast that is needed for your business. There are two main types of cash flow forecast that businesses use.

The two main types of cash flow forecast are the direct method used by treasury and cash managers to manage day to day cash and funding requirements vs the indirect method used by businesses to project future cash flows, projected balance sheets and profit and loss to plan and budget.

Indirect cash forecasting

Indirect cash forecasts are prepared for periods of 12, 24 and 36 months and longer, and include estimates of income and expenditure that are included in cash flow forecast, profit and loss and projected balance sheet reports, and are normally prepared as part of business forward planning.

Direct cash forecasting

Direct cash forecasting is used by treasury and cash managers in businesses and other organisations to manage short term liquidity and cash movements. A direct cash forecast helps to ensure suppliers are paid on time, customers pay on time and bank balances are managed properly in the short term.

What is indirect vs direct cash forecasting?

Indirect cash forecasts are used for long term planning vs direct cash forecasts are used to predict when cash will be coming in and out of the business in the short term. Indirect cash forecasts are used for raising finance vs direct cash forecasts are used manage the cash the business already has.

What is one advantage of using the indirect method to create a cash flow forecast?

The advantage of using the indirect method to create a cash flow forecast is that the reports help in long-term business decision making, as indirect cash forecasts show the amount of cash a business requires to fund long-term growth and capital projects, which includes investments and M&As.

Why do companies prefer the indirect method of cash flows?

Companies prefer the indirect method of cash flows as these are beneficial for long term business planning and investment, but indirect cash flows are not always easy to prepare as you need to estimate future revenue streams and predict expenditure to prepare accurate indirect cash flow forecasts.

What is the best way to forecast cash flow?

The best way to forecast long-term cash flow is to use the indirect method and prepare indirect cash flow forecasts, whereas the best way to manage short-term cash flow is the direct method and prepare indirect cash flow forecasts instead.

Indirect cash flow forecast template

The best way to begin an indirect cash flow forecast is to use a template. For an indirect cash flow forecast template please check this product here: Weekly Cash Forecasting Template.

But on the other hand, if you are looking to prepared long term cash flow forecasts using the indirect method, you are better to check this product: Cash Forecaster: Cash Flow Forecasting Software.

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