Cash flow forecasting methods 101: A guide for global SMEs

Cash flow forecasting gets complicated fast when you're operating across borders.  

Three problems in particular make it especially difficult:

• Exchange rates shift between the day you invoice and the day payment lands
• Traditional banks bury their FX spreads and intermediary fees, turning cost forecasts into guesswork
• Payment settlement times can vary wildly, making it tough to predict when suppliers get paid or when customer funds clear

Without the right forecasting methods, you're guessing at numbers that determine whether you can meet payroll, pay suppliers, or invest in growth.

This guide breaks down two core cash flow forecasting methods for international businesses, along with techniques you can layer on top.

What is cash flow forecasting?

Cash flow forecasting is the process of estimating how much cash will move into and out of your business over a specific period.

It works by projecting your future cash position based on expected inflows — customer payments, investment proceeds and loan drawdowns — against expected outflows like supplier payments, payroll, and loan repayments. The goal is to predict whether you'll have enough liquidity to meet obligations without scrambling for emergency funding.

One distinction worth noting: Cash flow forecasting isn't the same as profit forecasting.

A business can look profitable on paper while running out of cash if customers pay late or expenses land faster than expected. Profit measures what you've earned, while cash flow measures what you can actually spend.

For international businesses, the complexity multiplies. Your forecasts need to account for currency conversion timing, exchange rate movements between invoicing and payment, and cross-border settlement delays. Most companies forecast monthly or quarterly, but businesses with significant FX exposure often need weekly (or even daily) visibility.

So why does this matter?

The importance of accurate cash flow forecasting

Accurate forecasting helps you spot cash shortages before they become crises. You can identify seasonal patterns, negotiate better payment terms with suppliers, and make informed decisions about investments or expansion.

Without reliable forecasts, you're reacting to problems instead of proactively preventing them.

Why cash flow forecasting is especially challenging for businesses working across borders (and currencies)

International businesses face forecasting challenges that domestic companies rarely encounter. Each one introduces uncertainty that makes accurate cash flow projections difficult without the right tools.

Foreign currency exchange rates are volatile

Exchange rates move constantly throughout the day, often in tiny increments that compound quickly across transactions: A 50 basis point movement on a €5,000 payment costs you €25. Multiply this across 1,000 transactions in a year, and you're potentially looking at €25,000 in losses purely from FX rate movements.

And timing gaps can compound this. You may have invoiced a customer today, but the payment isn't due for 30 or 60 days. By then, the exchange rate will have shifted, and you won't know your actual home-currency receipt until the money lands. Forecasting becomes speculation rather than planning.

Timing can vary wildly with cross-border payments

Depending on the cross-border provider you’re working with, international payments can take anywhere from 2-5 business days to settle. The exact timing depends on factors outside your control:

• Bank operating hours at each institution in the chain
• Time zone differences between sender and recipient
• Intermediary banks handling the transfer
• Local holidays across multiple jurisdictions

To make it worse, many traditional banks only provide an "in progress" status, with zero visibility into where the payment actually sits or when it'll arrive. Without real-time tracking, every forecast relies on timing assumptions instead of actual payment status.

Hidden costs and unpredictable FX fees pop up constantly

You can't forecast expenses you can't see coming. And unfortunately, opacity is the norm with traditional banks when it comes to cross-border payments.

Banks often layer 2-4% spreads on top of mid-market exchange rates (without showing that markup clearly). Then intermediary bank charges appear seemingly out of nowhere, inflating total payment costs beyond your projections.

When FX spreads vary unpredictably from one transaction to the next, your cost forecasts will miss the mark.

The two primary cash flow forecasting methods to consider

Two core methods form the foundation of cash flow forecasting for international businesses. Each serves a different purpose and fits different situations.

1. The direct method: Track actual cash inflows and outflows as they happen

The direct method forecasts cash flow by tracking actual cash receipts and payments as they occur — rather than starting from accounting profits.

It categorises every cash movement into three buckets:

• Operating activities — sales receipts, supplier payments, payroll
• Investing activities — equipment purchases, asset sales
• Financing activities — loan drawdowns, loan repayments

This approach gives you the clearest picture of where cash actually comes from and where it goes.

How does the direct cash flow forecasting method work?

The process breaks down into four steps:

• List all expected cash inflows by category — customer payments, sales proceeds, loan proceeds, investment income
• List all expected cash outflows — supplier payments, payroll, rent, loan repayments, capital expenditures
• Calculate net cash flow for the period by subtracting total outflows from total inflows
• Roll forward your opening cash balance by adding or subtracting the net cash flow
  
  

When could you use the direct forecasting method?

The direct method works best when:

• You need granular visibility into specific cash movements
• Your operations are straightforward with clear cash conversion cycles
• You have reliable data on when customers pay and when you pay suppliers
• You're forecasting short-term (weekly or monthly) and can track actual transactions closely

If your business ticks those boxes, the direct method gives you the clearest operational view.

What challenges does the direct method create for international businesses?

For companies operating across borders, the direct method runs into familiar problems:

• Accurate payment timing forecasts are difficult when transactions span multiple currencies and time zones
• Exchange rate movements between invoicing and payment receipt create variance between projected and actual cash inflows
• Hidden bank fees and variable FX spreads make it hard to forecast exact cash amounts

These are the same pain points we covered earlier — and they hit the direct method particularly hard because it relies on precise transaction-level data.

2. Indirect method: Start with net income and adjust for non-cash items

The indirect method starts with your projected net income and adjusts it for non-cash expenses and changes in working capital.

It's a common approach because it connects directly to the income statements and balance sheets your finance team already produces. Instead of tracking individual transactions, you're working backwards from accounting profit to arrive at actual cash flow.

How does the indirect cash flow forecasting method work?

The process works in four steps:

• Start with your projected net income for the period
• Add back non-cash expenses like depreciation and amortisation
• Adjust for changes in working capital — increases in accounts receivable reduce cash, while increases in accounts payable add cash
• Factor in changes to inventory levels

The result is your projected cash position, derived entirely from financial statement data.

When could you use the indirect forecasting method?

The indirect method fits best when:

• Your business already produces detailed P&L forecasts and you want to derive cash projections from them
• You're focused on longer-term horizons (quarterly or annual) where overall cash generation matters more than individual transactions
• Your operations involve significant non-cash expenses like depreciation, amortisation, or stock-based compensation
• You're presenting to investors or lenders who expect this standard format

If you're already doing the P&L work, this method builds naturally on top of it.

What challenges does the indirect method create for international businesses?

The indirect method has its own set of cross-border complications:

• Translation risk affects net income when you consolidate foreign subsidiary results, creating volatility in your starting point
• You lose visibility into the timing of specific cash movements across currencies
• Working capital adjustments get complex when receivables and payables sit in different currencies
• Exchange rate movements on assets and liabilities create non-cash gains and losses that distort the forecast

The indirect method tells you how much cash you should have — but not when it'll actually arrive or in what currency.

5 cash flow forecasting techniques to layer on top of each core method

Once you've chosen your core forecasting method, these five techniques help eliminate the variables that create forecast variance for international businesses.

Each one addresses a specific challenge that makes cross-border cash flow forecasting difficult.

1. Maintain rolling forecasts to keep cash flow projections current

Rolling forecasts update continuously throughout the year instead of locking in a static annual budget.

The mechanics are fairly simple:

Set a fixed time horizon — usually 12-18 months ahead. Each month or quarter, drop the most recent completed period and add a new one at the end. You're always looking the same distance into the future. Along the way, revise your assumptions based on actual performance and updated market conditions.

Why does this matter for international businesses?

Exchange rates change constantly. A static annual forecast can become obsolete within weeks when you're operating across currencies. Rolling forecasts let you update currency assumptions monthly as rates move, keeping your projections grounded in reality instead of locked to January's guesses.

This approach works especially well when leadership needs current numbers for decision-making rather than waiting for annual planning cycles.

2. Use scenario planning to model multiple future cash flow outcomes

Scenario planning means building multiple versions of your cash flow forecast based on different assumptions about key variables — sales volume, customer payment timing, exchange rates and supplier costs.

Most teams model three scenarios:

• Best-case
• Worst-case
• Most likely

For FX specifically, try modelling a 5% favourable rate movement, a 5% adverse movement, and flat rates based on recent volatility ranges. This reveals how much currency swings actually impact your cash position and helps you decide whether you need additional risk management.

Scenario planning works best alongside your baseline forecast as a stress test — especially before major decisions like entering new markets, taking on debt, or committing to capital projects.  

3. Add predictability to future FX costs with forward payment contracts

Forward payment contracts lock in exchange rates for future payments, meaning you can essentially remove currency volatility from your forecasts entirely (the downside at least).

They're one of the most effective FX risk management tools available. Instead of guessing where rates will land, you're working with known costs.

The process is straightforward: Identify upcoming foreign currency inflows or outflows, then execute a forward payment contract with your cross-border payment provider to lock in the rate. You'll know the exact home currency amount weeks or months before the payment is due.

If you're managing cross-border payments with iBanFirst, you'll have access to three forward payment contract types:

• Fixed: lock in a rate for a specific future payment
• Flexible: lock in a rate with flexibility on timing within a window
• Dynamic: lock in a floor rate with the potential to benefit if rates move in your favour

Each removes the guesswork, letting you forecast with confidence.

4. Monitor cash positions across multiple currencies in real-time

Real-time consolidated tracking gives you live visibility into cash positions across all currencies from a single dashboard, making every forecasting method more accurate.

Here's how you can set it up, specifically if you're working with iBanFirst:

• Open a multi-currency account to hold funds across 25+ currencies
• Send and receive payments across 135+ currencies to 180+ countries
• View your current cash position 24/7 (both in each foreign currency and consolidated to your home currency)

Without this infrastructure, you're pulling data from multiple bank accounts into spreadsheets, manually converting currencies, and introducing errors along the way. Worse, fragmented visibility means you might look cash-short in one currency while holding excess in another — leading to poor allocation decisions.

5. Set budget rate targets to manage FX exposure

Budget rate methodology involves setting a weighted average exchange rate you plan to achieve for currency conversions throughout the year. This rate becomes your benchmark for both forecasting and measuring performance.

Here's how it works in practice:

• Analyse your foreign currency inflows and outflows to understand total FX exposure
• Set a budget rate (the weighted average you're targeting for the period)
• Forecast all foreign currency cash flows using your budget rate, rather than guessing at daily movements
• Monitor actual conversion rates and compare them to your budget rate throughout the year

This approach pairs well with forward payment contracts. Lock in rates close to your budget rate early, and you'll have a much better shot at hitting your targets.

How to choose the right cash forecasting approach for your business

The right approach depends on your operations, forecasting horizon, and team capabilities. Most international businesses end up using multiple methods together for comprehensive coverage.

Start with your forecasting time horizon

The direct method tends to work well for short-term forecasts (think weekly or monthly) where you need granular visibility into specific cash movements. You can track actual transactions closely and adjust quickly when payments land earlier or later than expected.

The indirect method fits longer-term horizons like quarterly or annual forecasts, where overall cash generation matters more than individual transactions. It connects naturally to the P&L projections your leadership team already reviews.

For businesses with significant FX exposure, consider layering rolling forecasts on top of either method as well. Static annual budgets fall out of sync with currency markets too quickly when you're operating across borders.

Match your method to the complexity of your operations

Businesses with straightforward operations and clear cash conversion cycles often benefit most from the direct method. If you're selling products with predictable payment terms and reliable supplier schedules, tracking actual cash movements is manageable.

On the flipside, companies with complex operations involving significant non-cash expenses like depreciation, amortisation, stock-based compensation may find the indirect method a better fit.

International businesses with multiple subsidiaries sometimes need both as well:

• Direct for operational visibility
• Indirect for consolidated reporting
  
  

Consider your team's forecasting capacity

Smaller finance teams without dedicated FP&A resources should likely start with the direct method. It requires less accounting expertise and connects directly to bank account activity that any finance person can track. The indirect method demands more sophistication to properly handle non-cash adjustments and working capital changes.

If your team is stretched thin, prioritise tools and solutions that reduce forecast variance like:

• Forward payment contracts that eliminate FX guessing
• Consolidated tracking that eliminates spreadsheet errors
• Access to human FX expertise can help you figure out the right combination for your specific situation

How iBanFirst can improve your cash flow projections

Accurate cash flow forecasting for international businesses requires more than better spreadsheets. It requires infrastructure that eliminates uncertainty at the source.

iBanFirst gives you the tools to put every method and technique we've covered into practice:

• Multi-currency accounts that let you hold, send, and receive funds in 25+ currencies
• Real-time payment tracking with timestamped updates you can share with suppliers
• FX risk management tools, including fixed, flexible, and dynamic forward payment contracts, to lock in exchange rates weeks or months ahead
• Transparent pricing so you can finally forecast costs accurately — no hidden fees throwing off your projections

Request an account with iBanFirst today and get the support you need to forecast confidently across borders.