Cash flow forecasting projects when cash will move into and out of the business. It is distinct from P&L forecasting because a company can be profitable and still run out of cash. Revenue recognized is not cash received. Expenses accrued are not cash paid. The gap between accrual and cash is where liquidity risk lives.
This guide covers why cash flow forecasting matters, the direct and indirect methods, time horizons, how to build a 13-week cash forecast, common challenges and how cash forecasting connects to the broader planning process.
Why Cash Flow Forecasting Matters
Companies do not fail because they are unprofitable. They fail because they run out of cash. The most common cause of avoidable financial distress is not a bad business model — it is a failure to anticipate when cash will be needed and whether it will be available.
Cash flow forecasting gives finance teams and leadership visibility into future liquidity so they can make informed decisions about spending, borrowing, investing and risk management.
Direct vs Indirect Method
Direct Method
Forecasts actual cash receipts and disbursements. When will customers pay? When do we pay vendors, payroll, rent, debt service?
Best for: short-term (13-week) liquidity planning
Indirect Method
Starts with net income and adjusts for non-cash items (depreciation, stock comp) and working capital changes (AR, AP, inventory).
Best for: medium and long-term cash planning
Most organizations need both. The direct method provides granular near-term accuracy. The indirect method scales better for longer horizons where transaction-level detail is impractical.
Time Horizons
13-week rolling (short-term)
Weekly cash receipts and disbursements. Managed by treasury. Used for daily cash positioning, covenant compliance and liquidity risk management.
6-12 month (medium-term)
Monthly cash projections tied to the P&L forecast. Used for working capital planning, credit facility management and investment timing.
1-3 year (long-term)
Quarterly or annual projections. Used for capital allocation, M&A planning, dividend policy and strategic financing decisions.
Building a 13-Week Cash Forecast
Start with opening cash
Begin each week with the actual or projected cash balance from the prior week.
Forecast receipts
Project customer collections by analyzing AR aging, payment terms, historical collection patterns and known large payments.
Forecast disbursements
Map all outflows — payroll, vendor payments, rent, debt service, tax payments, capital expenditures — to the week they are due.
Calculate net cash flow
Receipts minus disbursements gives the net cash movement for each week. Add to opening balance for closing balance.
Identify shortfalls and surpluses
Flag weeks where cash falls below minimum thresholds. Identify surplus weeks where cash can be deployed or invested.
Common Challenges
• AR timing uncertainty — customers do not always pay on terms. Historical patterns help but are not guarantees.
• Intercompany flows — multi-entity organizations struggle to forecast internal cash movements accurately.
• Capital expenditure timing — large projects frequently shift timing, creating material cash forecast misses.
• Organizational silos — treasury, accounting and FP&A often maintain separate, disconnected views of cash.
• Confusing profitability with liquidity — strong P&L performance does not guarantee cash availability.