īoth the ANI and PBS methods are best suited to the medium-term (up to one year) and long-term (multiple years) forecasting horizons. The ARM is best suited to the medium-term forecasting horizon. But because the ARM allocates both accrual reversals and cash effects to weeks or days, it is more complicated than the ANI or PBS indirect methods. It also eliminates the cumulative errors inherent in the direct, R&D method when it is extended beyond the short-term horizon. This allows the forecasting period to be weekly or even daily.
But instead of using projected balance sheet accounts, large accruals are reversed and cash effects are calculated based upon statistical distributions and algorithms.
This direct R&D method is best suited to the short-term forecasting horizon of 30 days ("or so") because this is the period for which actual, as opposed to projected, data is available. Disbursements include payroll, payment of accounts payable from recent purchases, dividends and interest on debt. Receipts are primarily the collection of accounts receivable from recent sales, but also include sales of other assets, proceeds of financing, etc. The direct method of cash flow forecasting schedules the company's cash receipts and disbursements (R&D). The cash flow projection is an important input into valuation of assets, budgeting and determining appropriate capital structures in LBOs and leveraged recapitalizations.ĭepending on the organization, then, this modelling may sit with " FP&A" or with corporate treasury.Ĭashflows may be forecast directly, as well as by several indirect methods. Cash flow is the change in cash or treasury position from one period to the next period.
Short term generally relates to working capital management, and longer term to asset and liability management.Ĭash usually refers to the company's total bank balances, but often what is forecast is treasury position which is cash plus short-term investments minus short-term debt. In the context of corporate finance, cash flow forecasting is the modeling of a company or entity's future financial liquidity over a specific timeframe: Certainly, if the business has a bank loan, the bank will want to look at the cash flow forecast at regular intervals.