What is the main purpose of a cash flow forecast?

The main purpose of a cash flow forecast is indeed to predict future cash shortages. This financial tool helps individuals and businesses anticipate their cash inflows and outflows over a specific period. By estimating when cash will be received and when it will be spent, a cash flow forecast enables better management of funds to ensure that there are enough resources available to cover expenses as they arise.

Effective cash flow forecasting allows for proactive measures to be taken if a potential cash shortfall is identified, such as rearranging payment schedules or seeking additional financing. This is crucial for maintaining financial stability and avoiding insolvency, as it helps in planning for times when cash might be tight.

While assessing profitability, complying with tax laws, and tracking spending are also important financial activities, these are not the primary focus of a cash flow forecast. Profitability relates to the overall financial performance, tax compliance ensures legal adherence, and spending tracking is about monitoring expenditures. Each of these has its own tools and methods distinct from the predictive nature of a cash flow forecast.