What is a cash flow forecast?

A cash flow forecast is defined as a written plan that outlines anticipated cash receipts and payments over a specific period of time. This financial tool is crucial for businesses because it helps to predict the cash position at any given time. By estimating the cash inflows (like sales) and outflows (such as expenses), a business can plan for potential shortfalls, manage liquidity, and make informed financial decisions.

Having a cash flow forecast enables businesses to ensure they have enough cash to cover their obligations, help with budgeting, and guide investment decisions. By proactively understanding cash flow, businesses can better navigate periods of economic uncertainty or changes in market conditions.

In contrast, other options focus on different aspects of financial management. Records of past transactions provide historical data but do not predict future cash movements. A summary of cash sales only provides a narrow view of cash inflows, omitting important cash outflows necessary for comprehensive financial planning. Tracking profits and losses addresses overall profitability but does not give insights into actual cash flow, which is critical for the day-to-day operation of a business.