How to forecast cash and cash equivalents in your cash flow forecast

Balance sheet forecasting for dummies as part of your cash flow forecast

When you prepare a cash flow forecast, it’s not necessarily just about cash. It may also include cash equivalents too, if your business has these on the balance sheet. So how do you forecast cash and cash equivalents and a forecast balance sheet? Let’s take a look in more detail…

How to forecast cash and cash equivalents in 20 seconds…

How you include cash and cash equivalents in your cash flow forecasts is relatively straightforward when it comes to cash. But with regards to cash equivalents, you need to take account of the maturity date for each cash equivalent. Your cash flow forecast needs to allow for when the cash equivalent can be converted into immediate cash, as and when it may be needed in the future. It is then the closing balance of both the cash and cash equivalents that you include on your forecast balance sheet at the end of each month or at the year end for your forecast period.

What should be included in cash and cash equivalents?

Cash and cash equivalents (CCE) refers assets on your company’s balance sheet under the heading current assets. They are your business current assets that are the most liquid.

Cash is as it says, which includes money held in physical cash (i.e. petty cash), but also money held in your bank accounts too. This includes your current (or in the US checking account) and savings accounts.

Whereas cash equivalents is made up of current assets with a maturity day of less than 90 days. This would include current assets such as treasury bills, marketable securities, money market funds and short-tern government bonds.

What is not included in cash and cash equivalents?

Investments in securities such as stocks, bonds, and derivatives are not included in cash and equivalents. This is because, even though these assets may be easily converted to cash, they can fluctuate in value. This type of asset are listed as investments on the balance sheet instead.

How to forecast cash and cash equivalents

Now armed with the above information, how do you forecast cash and cash equivalents and how are these included on your forecast balance sheet Let’s deal with cash first, as this is relatively easy when you are proficient at preparing Excel spreadsheets or if you use good cash flow forecasting software.

How to forecast cash

Your cash flow forecast will include your businesses various sources of income or cash-inflows, together with the various payments or cash outflows. The end balance at the end of each month, which is the net of the prior month’s closing balance, plus cash inflows, less cash out flows. It is this balance that you include on your forecast balance sheet.

How to forecast cash equivalents

When it comes to forecasting cash equivalents, you need to take account of the maturity date of the cash equivalents. So when you’re preparing your cash flow forecasts you include your cash equivalents so they appear on your balance sheet, but so that you can take account of their maturity time frame if they need to be converted to cash during your cash flow forecast period.

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