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Preparing and Using a Cash Flow Forecast 
 
by kmhagen September 07, 2005

Cash Flow Activities as Functions of Each Other

A cash flow forecast can be broken down into the same three basic sections as the statement of cash flows, that constitutes one of the basic financial statements:

  • cash flows from operating activities,
  • cash flows from investing activities,
  • cash flows from financing activities.

These three types of cash flow activities are interrelated.  They depend on, and affect each other.  The cash flow forecast should take this into account, and provide a complete picture of where cash will come from and how it will be used for the period being forecast.  The relationships between the different cash flow activities may depend on the nature of the business, the stage of development of the business, and general economic conditions, or conditions within the market or industry in which the business operates.

Ongoing Operations

For example, during a period of relatively normal ongoing operations, the results of the cash flow forecast for operating activities will probably feed the cash flow forecast of investing activities and financing activities.  If a cash flow forecast of operating activities shows cash surpluses during certain periods, these surpluses could be incorporated into a short-term investment plan.  On the contrary, if cash flows from operations are forecast to show a deficit, this information can be used to plan for the necessary financing.

Start-Up

The cause and effect relationship, especially during certain stages of a business, such as during start-up, may be inverted, and the cash flows available for operating and investing activities will depend on the cash flows generated by financing activities.  The amount of financing that can be obtained will determine the capital expenditures that can be made (investing activities) and the amount of working capital that can be used in the business (operating activities).

Growth and Expansion

During a period of growth or expansion, cash flows generated by operations may be used to finance growth, or cash flows from operations may be supplemented by cash flows from financing activities, in order to carry out investing activities, such as making additional capital expenditures to increase production capacity, investing in research and development, launching new lines of products, or starting up or purchasing new lines of business.

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