Cash flow forecasting

 

Cash flow forecasting:

            As important as estimating the overall costs and benefits of a project is the forecasting of the cash flows that will take place and their timing. A cash flow forecast will indicate when expenditure and income will take place. We need to spend money, such as staff wages, during the development stages of a project. Such expenditure cannot be deferred until income is received. It is important that we know that we can fund the development expenditure either from the company’s own resources (borrowing from the bank). Thus some forecast is needed of when expenditure such as the payment of salaries and bank interest will take place and when any income is to be expected.

Accurate cash flow forecasting is not easy, as it is done early in the project’s life cycle and many items to be estimated might be some years in the future.

            When estimating future cash flows, it is usual to ignore the effects of inflation. Forecasts of inflation rates tend to be uncertain. Moreover, if expenditure is increased due to inflation it is likely that income will increase proportionately. However, measures to deal with increase in costs where work is being done for an external customer must be in place.


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