Cash forecast is a future state of cash flow of an individual, family or business. It is drawn based on certain assumptions about likely cash receipts and payments. It lists up sources and uses of cash flow; the sources from which cash would be received and the uses to which cash would be put. In other words, it is a statement of likely cash receipts and payments.
The benefits of having a cash forecast is that we may know in advance what would be the state of our cash flow. Would we have a surplus or deficit? If we foresee a surplus, we will have plenty of time to decide what to do with the surplus? Where to invest or park? Surplus, by itself, is unproductive. It should therefore be either invested or kept in some interest-earning account. Depending upon the size and durability of surplus, one may choose investment and parking options. But left to itself, surplus will be quietly eaten up by inflation, that is the loss of purchasing power.
Deficit, on the other hand, is a state of inadequate cash to meet cash flow demands. If not managed well and in time, it may aggravate into a financial distress or financial crisis, with its related emotional and psychological problems.
Cash forecast is thus a key document to manage our finances. You may be amazed to know that no business runs without a cash forecast. You may have heard about four financial statements of a business, namely, Income Statement, Balance Sheet, Cash Flow Statement and Changes in Equity Statement. Those are the statements included in the annual report of any company and available in the public domain for listed companies. But one statement that is never in the public domain is Cash Forecast or Cash Budget. That is a statement prepared for and used by the internal management.
Cash Forecast Vs Cash Budget
What is the difference between cash forecast and cash budget? Cash forecast, as stated above, is a ‘future’ state of cash flows of a business, individual or family, based on certain assumptions. Cash Budget, on the other hand, is a ‘target’ state of cash flows of a business, individual or family, based on assumptions considered realistic and attainable by the management. Cash budget is what the management would like it to be, while cash forecast is a likely state. Cash forecast is, indeed, the first and basic step to prepare a cash budget. I may add that for a business; big, small, medium; domestic, multinational, it is the most essential statement. As you may know, profit making, dividend paying, businesses may fail, in the absence of adequate cash flow to meet their cash demand. Profit is an accrual concept based accounting number. Accrual concept based accounting numbers include both cash and credit transactions. So, a business making lots of credit sales, may have lots of income and profit, as income for a period includes both cash and credit sales; but inadequate cash flow, unless credit is collected promptly. Credit collection is also known as trade receivables management. And, many a business suffer for not being able to manage their trade receivables well. Cash forecast helps to monitor credit collection or trade receivables function in a business.
You may be amazed to know that even the Department of Treasury of the Government of United States of America prepares a Daily Treasury Statement (DTS). The DTS includes operating cash balance, deposits and withdrawals of cash, public debt transactions, federal tax deposits, income tax refunds issued (by check and electronic funds transfer (EFT)), short-term cash investments, and issues and redemptions of securities.
Do I need a Cash Forecast?
But does an Individual or family also need cash forecast? I would say no less than a business or Treasury. One may argue that my finances are small, why do I need what businesses need? The answer is power lies in seeing your cash flows in writing and regularly. I have seen clients realizing how many TV subscriptions they have after having a cash forecast. It helps to avoid/ reduce unnecessary and unaffordable expenses.
At the time of this writing, everyone, including individuals and businesses, is looking up to stimulus deal being debated in the Congress. Based on our previous experience with the Congress debates about financial matters, there is a very high probability of stimulus deal moving through the Congress and reaching President’s desk for his signatures. But how long will that stimulus check last in your hand? That can be answered by only a cash forecast by you for you and your family. How long did it last, last time, could be a good guide?
Let me conclude by saying that if you wanted to know and use one single financial document to help you manage your finances well, whether business or individual or family, it is the Cash Forecast/ Budget.
Dr Sat Parashar, PhD is former Director, IIM Indore. He teaches at University of California, San Diego, and is a Financial Services Professional. He may be reached at firstname.lastname@example.org