What methods are used for cash flow forecasting?

Cash flow forecasting methods include direct method, indirect method, and pro forma method.

The direct method of cash flow forecasting involves a detailed examination of each cash inflow and outflow. This method is often used by smaller businesses as it provides a detailed and accurate forecast. It involves analysing all the receipts and payments of the business, including sales, purchases, salaries, rent, and other expenses. This method is time-consuming but provides a comprehensive view of the company's cash flow.

The indirect method, on the other hand, starts with net income and then adds or subtracts items to adjust that income to the cash basis. This method is often used by larger businesses as it is less time-consuming and easier to perform. It involves adjusting the net income for changes in balance sheet accounts to calculate the cash from operating activities. This method is less detailed but provides a quick overview of the company's cash flow.

The pro forma method involves creating a cash flow statement based on projected future transactions. This method is often used for long-term cash flow forecasting and involves predicting future sales, expenses, and other cash inflows and outflows. This method requires a good understanding of the business and its market, as well as the ability to make accurate predictions.

Each of these methods has its advantages and disadvantages, and the choice of method will depend on the size of the business, the complexity of its operations, and the purpose of the cash flow forecast. It's important to remember that cash flow forecasting is not an exact science, and the accuracy of the forecast will depend on the accuracy of the data and assumptions used.