 A cash flow forecast is a financial document that shows the expected movement of cash into and out of a business in a particular time period

 Cash flow forecasts are based on 3 main concepts:  Cash inflows  Cash outflows  Net cash flow

 Money coming in  Comes from sales revenue (customers purchasing goods), payments from debtors, loans, interest earned from bank, sales of assets, rent earned from property owned  Referred to as receipts

 Money going out  Cash leaves a business when the business needs to pay bills  A business needs to itemise their expenses: labour, purchasing stock, rent, texes, advertising, interest, etc  Referred to as payments, expenses, outgoings

 The difference between the inflows and the outflows, in a particular period of time  A firm wants the net cash flow to be positive, however they may be able to service temporarily if they experience negative cash flow  Long term, inflows will need to be greater than outflows

 If a business needs external finance, a bank or lender will want to see a cash flow forecast to help them decide whether or not to lend $$  Help managers anticipate and identify times when they will be cash poor. They can then work out strategies to deal with this (e.g. arrange a bank overdraft to get thru the period when outflows are expected to be more than inflows)  Assists with a business’s planning process.

 Opening balance  The amount of cash a business has at the beginning of the trading period. The opening balance for one month will be the same as the closing balance in the previous month.  Closing balance  The amount of cash a business has at the end of the trading period.  Closing balance = opening balance plus net cash flow

Complete Question (a, b) on page 368 of your textbook. Write your answers in your workbook. Hint: do the cash flow forecast in pencil

a)

b) Outline the liquidity problem, i.e. the extent to which Cottam Stationers can meet its short term debts. The firm seems to be suffering from worsening liquidity as seen by the closing balance figures. The net cash flow for the first four months of trading is also negative suggesting the firm has insufficient working capital.