How to prepare a 3-way cash flow forecast?

In this article, we'll provide guidance on how to prepare a 3-way cash flow forecast. Many of you may ask, what is a 3 way forecast?

The concept of three way financial reports refers to the three main financial reports namely an income statement, cash flow statement and balance sheet.

When compiling a cash flow forecast and more specifically a 3-way cash flow forecast, you need to calculate forecast balances for your income statement, cash flow statement and balance sheet. When doing so, you should attempt to automate as many of these calculations to provide as much flexibility in your forecast model as possible.

View all our cash flow projection templates

In terms of the income statement, a lot of user input may be required for turnover and overhead expenditure items. In trade-based businesses, turnover amounts can be calculated based on estimates of units sold and average selling prices but in service-based businesses, turnover amounts may need to be user defined.

Gross profit and cost of sales amounts can be calculated based on user-defined gross profit percentages which would then also mean that cost of sales can be calculated by deducting gross profit amounts from turnover amounts.

Direct costs can be based on a percentage of turnover and where practical you may be able to base expense forecasts on activities like sales or production. Other expense amounts may need to be user-defined.

Forecasts for other income statement items like interest need to be based on outstanding loan amounts or loan amortization calculations. Depreciation and amortization can be based on property, plant & equipment balances and capital expenditure balances. Taxation and dividends can be calculated based on profit calculations.

Compiling an income statement therefore generally requires a lot of user input but this is not the case for balance sheets where all of the calculations usually need to be automated. You do not really want users to be setting user-defined values for balance sheet items!

Working capital assumptions like inventory days, debtors days and creditors days can be used to calculate inventory, receivables and payables balances and cash balances are generally used as a balancing figure on the balance sheet. This is after all what we are trying to calculate when creating cash flow forecasts!

The third financial report is the cash flow statement which can usually be fully automated by calculating weekly, monthly or annual amounts based on balance sheet movements. In some cases, you may however include user-input for some items like capital expenditure or cash received from issuing shares.

Three way cash flow forecasts can be compiled over weekly, monthly or annual reporting periods. We've set up a number of useful templates which contain a lot of automation and should save you a lot of time when setting up your 3-way financial reports!