CASH-FLOW FORECAST

What is cash flow? CASH FLOW – the movement of money into and out of a business bank account INFLOWS refers to money received by the business OUTFLOWS refers to money paid out by the business EXAMPLES: Sales revenue Capital Loans Grants EXAMPLES: Purchases Rent & Rates Wages & Salaries BUSINESS

Continued… The difference between the inflows and the outflows is called the net cash flow. Positive net cash flow – Inflows are greater than out flows Negative net cash flow – Inflows are not enough to cover out flows Cash Balance – the amount of money in a business’ account at any particular time

Continued… What will happen if a business’ net cash flow remains negative for some time? For this reason, businesses must use cash-flow forecasting to predict the cash balance at regular intervals so that action can be taken if a problem is foreseen.

Building a cash-flow forecast To build a cash-flow forecast you need to have the following information Opening Balance - the amount of money in the business’ bank account at the start of the period Income per Period – the amount of money expected to go into the bank account in that month Expenditure per Period – the amount of money expected to leave the bank account in that month Closing Balance – the amount expected to be in the bank account at the end of the period

Worked Example What can this business do in March and June? Why do you think cash-flow forecasting is important for a business?

Plenary Select the correct answer to each question and write the corresponding letter in your book Which of the following would not be a way of improving cash flow? Increasing the overdraft limit Chasing up debtors Upgrading equipment Destocking

Continued How is the “net cash flow figure” calculated? Opening balance + Cash inflows Cash outflows – Cash inflows Opening balance – Cash outflow Cash inflows – Cash outflows

Continued What is the net cash flow if the cash inflows for the month are £620 and the cash outflows are £1150? -£1770 -£530 £530 £1770

Continued What was the opening balance for May if the closing balance for the month was £9720 and the net cash flow in May was -£3645 £6075 £13365 £7290 -£6075

Continued Which of the following is not a problem associated with cash-flow forcasting? All figures are estimates Forecast does not allow for unexpected costs It is not used again once it has been created Costs can rise throughout the year

Answers Q1 – c) Upgrading equipment would increase cash outflows so cash flow would worsen Q2 – d) Q3 – b) Net cash flow = inflows – outflows = £620 - £1,150 = -£530 Q4 – b) Opening balance = closing balance – net cash flow = £9,720 – (-£3,645) = £13,365 Q5 – c)The cash flow forecast is used throughout the year to compare to the actual cash flow of the business

Factors that can change cash flow forecasts…. Credit terms- e.g. a supplier tells the business they can offer them a credit period with their order of 30, 60, 90 days. This means the business can predict that a payment might not be needed for 1, 2 or 3 months later than first thought. LINK TO EXAM QUESTION.

Opening and closing balances A business with a negative closing balance is often said to have liquidity problems. Is therefore then in the danger of becoming insolvent.

Problems in cash flows It is not accurate, it’s a prediction. Seasonal times affect cash flow forecasts. Might end of with more outflows than inflows and as a result have a negative net cash flow.

Solutions to the problems Overdraft arrangements Negotiate terms with creditors- Ask for credit instead of having to make cash purchases. Credit term agreement of 30,60 or 90 days. Payment plan Reviewing or rescheduling capital expenditure e.g. postpone the need for a new van/new item of machinery.

Cash Flow Forecast Benefits Limitations