Understanding the Basics of Cash Flow Forecasting & Management

Written by
Steven Gallucci

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Cash is fundamental to ensuring an organization can achieve its mission in the short term and sustain itself over the long term. As we advise our clients, cash flow is a frequent topic of conversation. Cash flow can determine which strategic options an organization can choose, who and when to hire, and the pace of growth.

All organizations monitor their cash flow to some extent: the degree to which they do varies greatly.  Some simply check their cash balance periodically. Others will take that data and adjust for potential future events.  Successful organizations, however, take a consistent and methodical approach to cash flow reporting.  They forecast future cash flows using known information, and adapt those forecasts as circumstances change.  This approach allows them to understand what is driving their cash and their organization. It also gives them the ability to see potential risks and opportunities.

With that in mind, let’s explore what a cash flow forecast is, how it’s constructed and how to read one.

Cash Flow Forecast – What is a cash flow forecast?

At its simplest, a cash flow forecast lays out the money coming in and going out of an organization over a set period of time. It’s important to understand that cash flow is not the same thing as accounting profits or losses.  The latter measures the economic effects of transactions, which may not always coincide with the cash impact. For example, the purchase of a large piece of equipment will cause immediate cash outflow. Accounting rules, however, dictate that the costs be capitalized and expensed over the course of several years.

A cash flow forecast should also provide comparisons to historic results. This gives the forecast a context in which projections can be evaluated. It can also highlight seasonal fluctuations, such as spikes in donations, grants, or salaries.

Lastly, the forecast gives an organization the ability to compare results to benchmarks, such as minimum balances desired, cash-related debt covenants and similar metrics.

What are the elements of a cash flow forecast?

The basic structure typically shows sources and uses of cash by category. It will typically show a beginning balance, followed by the inflows, the outflows, and the ending cash balance for the period.

Here’s a common layout of the report:

Period 1 (Actual) Period 2 (Forecast) Period 3 (Forecast)
Beginning Cash Balance 450.00 535.00 470.00
Inflows
Source #1 100.00 70.00 80.00
Source #2 50.00 25.00 40.00
Total Inflows 150.00 95.00 120.00
Outflows
Use #1 (25.00) (60.00) (35.00)
Use #2 (40.00) (100.00) (50.00)
Total Outflows (65.00)    (160.00) (85.00)
Net Cash Inflow (Outflow) 85.00 (65.00) 35.00
Ending Cash Balance 535.00 470.00 505.00

Unlike a Profit & Loss report, the forecast does not necessarily need a great deal of detail. The forecast should capture the largest and most variable sources and uses of funds.  Salaries, for example, are often the largest cash outflow an organization will have, but are often fairly predictable.  Planned giving, on the other hand, can be both large and unpredictable.  Both would be good candidates for separate line items in the cash flow.

The format of the report can change over time, depending on the organization’s need. However, it’s best to construct the report in such a way that changes will be infrequent, in order to reduce time spent re-categorizing historical amounts or breaking out groups of items previously forecast in one category.

Cash Flow Management – How should the data provided in a forecast be used?

The example above provides us the opportunity to ask a number of questions. Such as:

What is causing the decreased cash flow in Period 2?

Are there any steps the organization can take to minimize the reduction in cash, or is the expenditure necessary to improve cash flow in future periods?

How does our ending balance compare to levels required by lenders or for internal operations?

How does the trend in cash balances compare to budgets, historical norms, and Board expectations?

How much of our cash balance is donor-restricted?

  1. These questions and the discussions they initiate can lead you to a deeper understanding of your organization and the opportunities open to it.

We can help you. For more information on our services, please contact Saleha Walsh or Russell Greenwald at 781-235-1490.