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Cash Flow Forecasting

 
  Arthur F. Rothberg, Managing Director, CFO Edge, LLC  
   
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  Article Summary  

A cash flow forecast, or cash flow projection, is a key element of financial strategy that supports near-term financial processes, overall capital structure and asset valuations.

Included in this CFO Edge article is a look at the eight ways cash flow forecasting helps a company assert control of its financial situation. Both direct and indirect methods of cash flow forecasting are addressed with the former including the receipts and disbursements method, while indirect methods reviewed include adjusted net income, pro-forma balance sheet and accrual reversal.

The six basic steps involved in developing a direct-method cash flow projection are discussed, and the article looks at strategies for addressing potentially problematic activity ratios such as days sales outstanding, days payments outstanding and inventory turns. The article also comments on the importance of creating balanced credit policies so that they are neither overly strict nor overly lax.

Proactive cash flow management requires a systematic approach, and the cash flow forecast should be thought of as a living document that helps a business make investments with confidence, plan capital expenditures strategically and set reasonable goals.

 
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