What is the main purpose of a cash flow forecast?

The main purpose of a cash flow forecast is to estimate future cash inflows and outflows. This forecast is a critical financial tool that helps businesses anticipate their cash needs over a specific period. By projecting cash flows, organizations can plan for upcoming expenses, identify potential cash shortages, and make informed decisions regarding investments, savings, or borrowing. Accurate cash flow forecasting enables businesses to ensure they have sufficient liquidity to meet operational needs and can also aid in strategic planning by highlighting trends and patterns in cash movements.

Tracking historical cash movements focuses on past performance rather than forecasting future needs, while compiling a budget for expenses tends to concentrate on setting spending limits rather than predicting cash flow for revenue and cost management. Analyzing investment opportunities is a strategic function that may be impacted by cash flow but is not the primary purpose of a cash flow forecast. Thus, estimating future cash inflows and outflows is essential for maintaining financial health and effective business operations.