An accurate cash flow forecast helps companies predict future cash positions, avoid crippling cash shortages, and earn returns on any cash surpluses.

There are two primary types of forecasting methods: direct and indirect. The main difference between them is that direct forecasting uses actual flow data, where indirect forecasting relies on projected balance sheets and income statements.

Choosing the right forecasting method depends on the cash flow forecasting window you selected above, as well as the kind of data you have available to build your forecasting model. Here’s a breakdown of what each method is most effective for:

How to Forecast Cash Flow

The best way to forecast cash flow for your business depends on your business objectives, your management team’s or investor’s requirements, and the availability of information within your organization.

For example, a company seeking to gain visibility over quarter-end covenant positions will need a different forecasting process than a company that needs to manage debt repayments on a weekly basis. Here’s the process we recommend for building a cash forecasting model, as well as what kinds of data you’ll need access to in order to do so.