Cash flow forecasting

Overview

Cash flow forecasts are critical components of financial models. While the P&L and balance sheet are closely tied to the general ledger from your accounting system, the cash flow statement is added as an extra item in Francis. In this guide, we walk through six steps to set up your cash flow statement via the indirect method.

Basics

Calculations

As cash flows are estimated using the indirect method, all cash flow items are derived from items on the income statement and balance sheet. When modeling your cash flow statement in Francis, always use calculations. Calculations are characterized by the following properties:

• They are formula-consistent over time. I.e., always include the same formula.

• They do not include actuals imported from accounting systems; values are always derived from other rows.

Cash flow categories

Organize your cash flow statement into three primary categories: operating activities, financing activities, and investment activities. While these are the standard sections, you can add more categories or subcategories as your financial model requires.

• Operating Activities: This section focuses on the cash flows that arise from your company's core operations. Start with the net income for the period and make adjustments to reflect the cash components, e.g., add back depreciation.

• Financing Activities: This section captures cash flows from external financing sources. It encompasses activities related to issuing debt or equity.

• Investment Activities: Account for cash inflows and outflows linked to acquiring or disposing of long-term assets. It's crucial to remember that accumulated depreciation is not a cash item and should be excluded from this section.

P&L and balance sheet

Since the cash flow statement is derived from movements in the P&L and balance sheet, you'll need to ensure that these are set up correctly before modeling your cash flow statement. Start by structuring your P&L and balance sheet to your liking, then map your chart of accounts accordingly.

Cash and retained earnings

Cash and retained earnings link the financial statements together and should be forecasted in specific ways.

Forecast the P&L and balance sheet

As cash flow statements are derived indirectly in Francis, forecasting cash flows requires forecasting all P&L and balance sheet items.

Forecasting balance sheet items is often more advanced than forecasting P&L items. Check out forecasting methods for guidance on forecasting for balance sheet items, specifically fixed assumptions and the prior month's balance.

Formulas for cash flow categories

The indirect method dictates that cash flow movements are a product of the P&L and changes on the balance sheet. Consequently, cash flow values are calculated by referencing the P&L and balance sheet items. Remember to work with deltas when referencing balance sheet items, i.e., calculate the difference between this month's and last month's values.

Assets Differences in assets should be subtracted. Increasing assets lead to decreasing cash flow.

Liabilities and equity Differences in liabilities and equity should be added. Increasing liabilities or equity lead to additional cash flow.

Almost all balance sheet items, except items like cash, retained earnings, and accumulated depreciation, should be included in a category to ensure that all balance sheet movements are accounted for.