Cash flow forecasting: how long should you plan for?

Should I forecast the cash flow of my company for the next week, month, quarter, year or any other period of time?

Short answer: at least three months.

Longer answer: of course, it does depend what business you are in. But think of it from this perspective: what if the forecast suggests your company is going to have a cash shortage and “simple tricks” (like asking some of your clients to pay a few days early or agreeing that some of your suppliers will wait a few days longer) would not be enough to solve it?

The period you plan for should be longer than the amount of time you would require to “fix your cash flow”.

In most cases you would have to choose between three options: additional incoming payments, reducing costs or borrowing.

Additional incoming payments means that your company wins new orders from clients, delivers the services, invoices them and receives the payment. For a software development company, marketing agency, consulting firm, construction company or a similar services business this means 3-6 months or even more.

If you decide that winning new orders is unlikely and reducing costs is the way to go, this also means long lead times. Whether it is giving up half of your office space or parting ways with some team members, you have to notify your counterparties well in advance.

If you decide to borrow additional funds, whether it is shareholders, bank or any other lender, they will want to know what are their chances of recovering their loans. This means – what does your cash flow forecast look like at least until the moment your company would be in a position to repay the loan. Also, it might easily take more than a month between the first conversation and when the loan is granted and paid out.

So there is no “one size fits all”: some companies need to forecast for 6-9 months while for others 3 months or even less might be just fine. Therefore at Tailwind we decided to make it easy for you: your forecast always starts on today’s date and timeline goes as far in the future as you need it to. No need to add or delete rows or columns and check formulas every time like in case of a spreadsheet.

What period is your company forecasting for? Do you agree with the above approach? Please let us know!