GCSE Business Studies Unit 2 Developing a Business Cash Flow Forecasts

Learning Outcomes Students should be able to: explain the purpose of cash flow forecasts, in the context of both forward planning and review analyse the importance of cash flow to a business complete parts of a cash flow forecast calculate and interpret a simple cash flow forecast analyse the consequences of incorrect forecasting Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Cash Flow Forecast A cash flow forecast is a prediction of the money likely to come into and go out of a business over a period of time Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It enables the owner or manager to plan the business’s expenditure Perhaps a machine has to be replaced during the year while other expenses such as electricity always have to be paid. Recording all forecasted expenditure enables the business to see if these payments would result in cash shortages at certain times.  Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It shows the amount required and when it is needed Any business wishing to borrow money will see from the cash flow forecast exactly how much needs to be borrowed and exactly when the extra cash is required. This prevents the payment of interest for longer than necessary. Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It shows when loans could be repaid Presentation of a cash flow forecast would show the bank or other lender if, and when, the business would be able to repay the loan. This would encourage the bank to give a loan. Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It inspires confidence and acts as a check on spending A cash flow forecast gives the owner confidence, and shows if the business’s financial plans are being maintained. Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It supports the business’s business plan A cash flow forecast is required as part of the business plan. Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It sets targets for the business At the end of the period, the targeted figures can be compared with what actually happened. The difference between what actually happened in the business and the forecasted performance is known as the variance. Owners would have to investigate the cause of large variances. Images © thinkstockphotos.co.uk

Purpose of a Cash Flow Forecast It sets targets for the business At the end of the period, the targeted figures can be compared with what actually happened. The difference between what actually happened in the business and the forecasted performance is known as the variance. Owners would have to investigate the cause of large variances. Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk RECEIPTS JAN FEB MAR APR MAY JUN TOTAL Sales 1000 2000 9000 New Capital 8000   TOTAL RECEIPTS 17000 PAYMENTS Purchases 500 4500 Salary 600 3600 Wages 400 2400 Equipment 3000 Rent Electricity 180 360 Telephone 100 200 Insurance 300 TOTAL PAYMENTS 5200 1900 2180 2680 16760 Opening Balance 3800 2900 1720 1320 920 10660 Add Receipts 4800 3900 3720 3320 2920 27660 Minus Payments CLOSING BALANCE 240 10900 Images © thinkstockphotos.co.uk

Consequences of Incorrect Forecasting Shortage of working capital – wages or supplies may not be paid It may cause capital to be unused Some of the business’s assets may have to be sold Purchases may be made at the wrong time Trading opportunities may be lost Business may have to close Banks may not lend money Targets may not be met Business may need a loan/overdraft Images © thinkstockphotos.co.uk

Images © thinkstockphotos.co.uk Pupil Activity Working individually you have twenty minutes to answer the following past paper questions: 2011 Question 3 a, b & d 2013 Question 3 a - c 2014 Question 3 a - c 2016 Question 3 a - c Images © thinkstockphotos.co.uk

Learning Check Can you: explain the purpose of cash flow forecasts, in the context of both forward planning and review analyse the importance of cash flow to a business complete parts of a cash flow forecast calculate and interpret a simple cash flow forecast analyse the consequences of incorrect forecasting Images © thinkstockphotos.co.uk