Cash flow forecasting


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Cash flow forecasting

  1. 1. Cash-flow forecasting
  2. 2. What is a cash flow forecast and why is one drawn up? <ul><li>A record of the cash-inflows and outflows of a business </li></ul><ul><li>A cash flow shows if a business has enough cash to cover its day-to-day costs over the course of a year </li></ul><ul><li>Allows a business to see where any short falls in cash may occur in the future and to either adjust its costs, revenue or borrowing accordingly </li></ul><ul><li>Essential for borrowing money and therefore a key part of any business plan </li></ul>
  3. 3. the components of a cash flow forecast <ul><li>cash inflows – sales revenue either from cash or credit sales (income from these will be deferred), loans, grants, capital (money from owners or shareholders), </li></ul><ul><li>cash outflows – wages, materials, rent and rates, heat and light etc </li></ul><ul><li>net monthly cash flows – difference between the cash inflow and cash outflow </li></ul><ul><li>opening balances – money in bank at the start of each month (previous month’s closing balance) </li></ul><ul><li>closing balances – calculated by adding the net cash flow and opening balance together </li></ul>
  4. 4. net monthly cash flows <ul><li>This is the difference between the cash inflow and cash outflow </li></ul><ul><li>For the Cathedral Bookshop for January the net cash flow is 47300 – 38350 = 8950 </li></ul><ul><li>You will notice £ signs are not written in the cash flow forecast </li></ul>
  5. 5. Closing Balance <ul><li>closing balances – calculated by adding the net cash flow and opening balance together </li></ul><ul><li>For the Cathedral Bookshop for January the closing balance is: </li></ul><ul><li>0 (opening balance) + 8950 (net cash flow) </li></ul><ul><li>Answer = 8950 </li></ul>
  6. 6. opening balances <ul><li>opening balances – money in bank at the start of each month </li></ul><ul><li>From the Cathedral Bookshop’s cash flow you will notice that for January the amount is zero, because the bookshop is a new business </li></ul><ul><li>Note also that in February the opening balance is the previous month’s closing balance i.e. 8950 – this is the case for the following months </li></ul>
  7. 7. Exercise 1 <ul><li>Answer questions A, B, C, D , E and F on the sheet provided </li></ul><ul><li>For question A you write in the figures for May and June on the cash flow table provided </li></ul>
  8. 8. Cash flow for Cathedral Bookshop (£) 13900 -1050 Closing balance 14950 2200 Net cash flow -1050 -3250 Opening balance 2550 12800 Total cash outflow 0 250 machinery 0 0 Telephone 0 10000 rent 350 350 Interest on Loan 2200 2200 Wages 0 0 Purchase of Stock Cash outflow 17500 15000 Total cash flow 17500 15000 Revenue 0 0 Bank Loan 0 0 Savings Cash inflow June May
  9. 9. the reasons why businesses forecast cash flow and the benefits of the process <ul><li>Allows managers to anticipate shortfalls– overdrafts can then be arranged, or liquid assets made available to maintain working capital </li></ul><ul><li>Allows managers to anticipate surpluses of cash - assets can be purchased or money invested elsewhere to gain higher returns </li></ul><ul><li>Can anticipate the need to spread payment for assets over a period of time </li></ul><ul><li>Encourages managers to borrow the minimum amount at the lowest interest rate </li></ul><ul><li>Supports an application for borrowing </li></ul>
  10. 10. How does a business overcome cash flow problems? <ul><li>Try to arrange an overdraft </li></ul><ul><li>Try to reduce costs </li></ul><ul><li>Try to increase cash coming into the business through increased sales </li></ul>
  11. 11. Exercises <ul><li>Quick questions 1, 2 & 3 on page 136 </li></ul><ul><li>Case study questions on page 137 </li></ul>