3. 20 Using a cashflow forecast

3.20 Using a cashflow forecast What is ‘cashflow’?  The flows of money into and out of the business  Money flows in through revenue from sales of service or product  Money flows out when wages and expenses are paid or stocks are purchased.

3.20 Using a cashflow forecast The principle of cashflow 1  More money IN than OUT = cashflow positive. BUT high surplus of cash should be avoided in non-interest bearing account)  More money OUT than IN = cashflow negative. Can mean shortage of cash to pay bills AIM is to have a positive cashflow or at least a balance.

3.20 Using a cashflow forecast The principle of cash flow Cash too high Cash OK Cash too low Revenue in Expenses out

3.20 Using a cashflow forecast Inflows Inflows = money received from  Customers  Local and national government grants  Sale of property or equipment  Loans

3.20 Using a cashflow forecast Outflows Outflows = money spent by the business on  Wages and salaries for staff  Raw materials or stock  Gas, electricity, water and telephone  Rent and business rates  Interest on loans  VAT  Equipment purchases

3.20 Using a cashflow forecast Cashflow forecasts Cashflow forecasts are prepared when:  A new product or service is planned  New resources (eg new machinery) is being bought  A major sales campaign is planned  There will be a large increase in existing activities, eg making or selling many more products

3.20 Using a cashflow forecast A basic cashflow diagram Jan £ Feb £ Mar £ Apr £ May £ June £ Opening balance 5,000 7,000 4,000 6,00012,00015,000 Add inflows 20,00022,00018,00020,00023,00018,000 Total25,00029,00022,00026,00035,00033,000 Less outflows 18,00025,00016,00014,00020,00033,000 Closing balance 7,000 4,000 6,00012,00015,000 0

3.20 Using a cashflow forecast A full cashflow forecast See page 341 in Student Handbook. A = sum of numbers under the inflow heading B = sum of numbers under the outflow heading C = difference between A and B, called net cashflow D = balance of money in bank at the start of the month E = adjusted bank balance after adding or subtracting the net cashflow figure

3.20 Using a cashflow forecast Computers and cashflow 1  Once the data and formulae have been entered, the calculations can be done quickly and accurately  ‘What if’ calculations can be carried out swiftly  Alterations to data can be made quickly and recalculations done automatically Spreadsheet packages are ideal for cashflow forecasts because:

3.20 Using a cashflow forecast Computers and cashflow 2 Potential problems with using a computer are:  Incorrect data or formulae will lead to wrong conclusions  Spreadsheets take time to set up  Computer data can be lost or corrupted