Cash is the lifeblood of all business. And Cash flow is a term used to describe the pattern of cash coming into and going out of the business bank accounts over a given time period. Very few, if any, businesses can continue operating successfully if cash flow slows or worse stops over any extended period of time. It is therefore necessary to assess and estimate what amounts of cash will be needed and available to the business over the short, medium and long terms. If cash stops circulating within the business it can result in serious problems and ultimately failure for the business e.g. recent problems at Northern Rock. On the other words, we can say that the cash is the basic foundation of the business. A cash flow forecast can be produced in a variety of ways but generally it will include the essential lines such as Inflows (e.g. money from customers, investors, refunds, cash from bank loans), and Outflows (e.g. money paid out to suppliers, to staff for wages, loan repayments, VAT and other taxes).
There is a direct link between a business’ cash flow and its accounts both financial and management accounts which can be divided into Last year’s performance, Current year’s cash flows, and Current year’s performance. Although there are a number of commercially available software tools that help produce cash flow forecasts and financial analysis models. The most common would be the use of spreadsheets to start creating a cash flow model for example Microsoft’s Excel program. Usually the models are self created and self maintained due to the low cost and ease of using such software.