Forecasting Cash Flow

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Overview

Cash flow forecasts are essential parts of a robust financial model. While the P&L and balance sheet pull directly from your accounting system’s general ledger, the cash flow statement in Francis is created separately. This guide outlines six steps for setting up your cash flow statement using the indirect method.

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Basics

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Calculations

Because the indirect method uses information from the income statement and balance sheet to determine cash flows, all cash flow items in Francis are calculated rows. Calculated rows share these traits:

• They maintain formula consistency over time, applying the same logic each month.

• They don’t include directly imported actuals. Instead, values are derived from other rows.

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Cash Flow Categories

Organize your cash flow statement into three main categories:

• Operating activities: Start with net income and adjust for non-cash items like depreciation.

• Financing activities: Capture all inflows and outflows related to debt, equity, and other financing sources.

• Investing activities: Record cash movements related to acquiring or disposing of long-term assets. Remember to exclude accumulated depreciation since it’s a non-cash item.

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P&L and Balance Sheet

Because the cash flow statement relies on P&L and balance sheet movements, ensure these statements are properly structured and mapped first. Once set up, you’ll have the foundation you need to accurately model your cash flow.

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Cash and retained earnings

Cash and retained earnings are key links between the financial statements. Treat them carefully when creating your forecast, as they ensure that all three statements remain connected.

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Forecasting

To forecast cash flows, you must forecast your P&L and balance sheet items. This often involves more detailed modeling for balance sheet items than for P&L items. Refer to our forecasting methods for guidance, particularly around fixed assumptions and referencing the prior month’s balances.

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Formulas for Cash Flow Categories

The indirect method calculates cash flow movements by referencing P&L and balance sheet changes. When working with balance sheet items, use the difference between this month’s and last month’s values (deltas).

• Assets: An increase in assets reduces cash flow (subtract the change).

• Liabilities and equity: An increase in liabilities or equity adds to cash flow (add the change).

Include all balance sheet movements (except those related to cash, retained earnings, and accumulated depreciation) in one of your cash flow categories. This ensures your cash flow statement fully reflects the changes in your financial position.