As businesses expand and become more complex, the methodologies for cashflow forecasting evolve.
For companies with a turnover exceeding £7.5 million (i.e. a medium-sized entity), effective cashflow management can help you achieve sustainable growth but the key at this level is understanding your business’s liquidity over time, maintaining financial flexibility and ensuring that cash is available to meet future obligations.
This is especially true for medium-sized companies, where cashflow fluctuations can be more pronounced and have a more significant impact on operations.
At this scale, it’s essential to keep an eye on operational costs, customer payment cycles, inventory management, capital expenditure and the broader economic environment.
The direct method of forecasting cashflow
The direct method is one of the most intuitive approaches to cashflow forecasting and involves forecasting cash inflows and outflows based on actual business transactions.
For a medium-sized company, this method provides granular control over cash management, especially when there are multiple revenue streams, significant capital expenditures or a wide array of operational costs.
Benefits:
- High accuracy as it’s based on actual cash transactions.
- Real-time insights into operational cash movements.
- Immediate identification of cash shortfalls or surpluses.
Challenges:
- Resource-intensive, as it requires a thorough and ongoing tracking of all cash movements.
- Can be cumbersome for companies with complex supply chains or a broad customer base.
The direct method tends to be best for companies with relatively stable and predictable cash inflows, such as subscription-based businesses or businesses with long-term contracts.
Indirect method (accrual-based) of forecasting cashflow
This method begins with net income (based on accrual accounting) and adjusts for changes in working capital, depreciation, non-cash expenses and other adjustments.
Benefits:
- Reflects the broader financial health of the business, including profitability and non-cash items.
- Useful for companies with significant investments in fixed assets or inventory that don’t directly impact cash in the short term.
- Provides a clearer picture of the company's overall financial situation.
Challenges:
- Requires a deep understanding of accruals and adjustments, making it more complex.
- May not provide as immediate an overview of cash availability compared to the direct method.
The indirect method is best for companies with complex financial structures, such as those with inventory-based businesses, long-term investments or those operating in industries like manufacturing or real estate.
What is a rolling cashflow forecast?
A rolling cashflow forecast is an ongoing projection that is updated regularly, usually monthly or quarterly, using the latest financial data.
This gives you a clearer, more current view of your cash position and helps you spot potential gaps early, giving you more time to respond.
It can support better decision-making because it reflects real changes in the business, rather than relying on outdated assumptions.
However, it does require accurate data and consistent reporting, and it can take time to maintain, particularly for businesses with lots of moving parts.
Rolling forecasts are often best suited to larger businesses or those with changing sales patterns, seasonal demand or project-based work, such as retail, construction or similar sectors.
How to choose the right methodology for your cashflow forecasting
A company with varied revenue streams, seasonal demand, major capital expenditure or rapid growth is likely to need a more sophisticated approach to cashflow forecasting, such as rolling forecasts, scenario planning or automated forecasting tools.
A business with simpler operations or less structured data may need to start with a more manual process before developing this over time.
Your internal finance team or accountant will usually be well placed to assess what information is available and what level of forecasting is realistic.
However, it can also be useful to speak to a professional outsourced accountant, particularly if you need an independent view, want to improve your existing processes or are planning for growth, investment, funding or acquisition activity.
The aim is to create a forecasting process that supports better decisions, helps you anticipate funding needs, manage risks, identify investment opportunities and respond more confidently to change.
For larger businesses, especially those with turnover above £7.5 million, a strong forecasting process can be an important part of staying resilient, agile and ready for future growth.
For more information on cashflow forecasting, please get in touch with our experts.
