1. 1.3.4 Forecasting cash flows
Here are some of the terms we will use in this presentation, can you work out what they are?
PRICE SET money coming into the business
MAN TYPES money going out of the business
ASCOT REF making predictions into the future
ABLE CAN what is left in the bank
Receipts
Payments
Forecast
Balance
1.3.4 Forecasting cash flows
BUSS1.3.4 Forecasting cash flows

2. The nature of cash flow Cash flows into AND out of a business
Cash sales
Payments from debtors
Owners’ capital invested
Sale of assets
Bank Loan
Purchasing stock
Paying wages
Paying debts – bank loans, creditors
Purchasing assets of assets
Cash flow is interested in the balance between these cash inflows and cash outflows in terms if their relative size and timings.
BUSS1.3.4 Forecasting cash flows

3. The nature of cash flow
Cash flow is important to a business as it needs to ensure a positive cash balance in order to be able to meet day to day expenses
A potentially profitable business may fail because it has cash flow problems
BUSS1.3.4 Forecasting cash flows

4. Factors affecting the nature of cash flow
Transaction types
Sales and Purchases - Cash v. Credit
Payment terms
Timings of cash flows
Seasonal Sales e.g. Strawberry farm
Timings of payments in and out e.g. Package holiday company
Nature of business
Start-up capital and costs
Time taken from input to output
Stock holdings
BUSS1.3.4 Forecasting cash flows

5. The nature of cash flow
A cash flow forecast is a forward looking statement that tries to predict cash inflows and outflows in the future
Cash flow forecasts are an important part of a business plan
A cash flow statement is a backward looking statement that shows what happened to cash inflows and outflows
Cash flow statements are normally presented as a part of a business’ accounts
Cash flow problems can lead to business failure (Insolvency).
A business that cannot pay its short term debts is in danger of becoming an ex-business!
BUSS1.3.4 Forecasting cash flows

6. How to forecast cash flow – a prediction of the monthly inflows and outflows
Cash inflows
Owner’s investment or other source of finance
Cash sales estimated from sales forecast
May be over or under estimated
To some extent depends upon the scale of research
More difficult for new businesses
Debtor payments estimated from sales forecast
Determined by credit terms offered to customers
BUSS1.3.4 Forecasting cash flows

7. How to forecast cash flow – a prediction of the monthly inflows and outflows
Cash outflows
Payment of fixed costs
These should be easy to estimate on a monthly basis
Payment of variable costs
If sales are difficult to forecast logically so must the costs associated with meeting them
Made more difficult if suppliers are free to change the prices
Unforeseen expenses
Or just forgotten expenses! A new entrepreneur may find it difficult to estimate how much they will be
Payment terms
What if a supplier changes terms and wants payment sooner or a lender demands their money back
BUSS1.3.4 Forecasting cash flows

8. Filling in a cash flow forecast
Jan
Feb
Mar
Receipts (£)
10 000
15000
17500
Payments
Raw materials
3500
4000
5500
Fixed Costs
5000
Other costs
4500
Total Payments
12500
13500
15500
Net cash flow
(2500)
1500
2000
Opening Balance
(500)
1000
Closing Balance
3000
Add the costs to get Total Payments
Receipts minus Total Payments = NCF
() denote a negative figure
Cash inflows (Receipts) – cash outflows (Payments) = Net Cash Flow
Net cash flow + opening balance (start of month) = closing balance (end of month)
BUSS1.3.4 Forecasting cash flows

9. Filling in a cash flow forecast – your turn
You may be asked to fill in the blanks on a cash flow forecast. See if you can do it here.
Jan
Feb
Mar
Receipts (£)
8000
6000 e
Payments
Raw materials
3000 c
4000
Fixed Costs
2500
Other costs
3500
Total Payments a
10000
Net cash flow b
(2000)
(500)
Opening Balance
1000
(2500)
Closing Balance d
(3000)
a = =9500; b = = (1500); c = 8000 – ( ) = 2500;
d = (2000) + (500) = (2500); e = (500) = 9500
BUSS1.3.4 Forecasting cash flows

10. Why businesses forecast cash flow
To identify the timing and significance of any potential shortfalls
To identify possible corrective action
To help secure finance from potential investors or the bank
To give confidence about short term survival
To provide a guide against which to measure actual cash flow
BUSS1.3.4 Forecasting cash flows

11. cash flow – stock levels and credit terms
A business that is running low on stock will need cash or credit to reorder
No stock means that sales will fall
Firms with cash flow problems might be able to order on credit – buy now, pay later
Suppliers will offer different credit terms to different customers depending on their credit worthiness
Who would you give credit to in your class? How much money would you be willing to give? When would you want your money back?
BUSS1.3.4 Forecasting cash flows

12. The purpose and contents of business plans
What is a Business Plan?
According to Business Link:
‘A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. It has many functions, from securing external funding to measuring success within your business.’
A Business Plan is a living, breathing document that will change and grow as your business grows. It will be used both internally, for your own use, and externally, by banks, external investors or those willing to provide grants.
BUSS1.3.4 Forecasting cash flows

13. The role and importance of a business plan in minimising the risk involved
A business plan is helpful in estimating the cash inflows and cash outflows that a firm faces
A business plan will help in forecasting:
Fixed costs e.g. rent, bank loans
Variable costs e.g. stock
It will provide a focus on the various costs, revenues and other cash inflows that a new business will have
BUSS1.3.4 Forecasting cash flows

14. What are the contents of a Business Plan?
The Executive Summary
The most important part of the Business Plan. This provides a synopsis of the entire plan looking at the most important points. Often an external agent such as a bank will not go further than reading the executive summary. If the summary does not make the business sound worthwhile then the Bank Manager may not read on. Venture Capitalists and other external investors will often be put off a business start-up if it is not clearly explained and fails to capture their imagination.
BUSS1.3.4 Forecasting cash flows

15. What are the contents of a Business Plan?
Your business and the product that you are selling
The Business
- start-up date
- legal structure
- business sector e.g. retailing
The Product
- how is it differentiated?
- why will it sell?
- do you have a copyright, trademark or patent?
- how will you develop your product?
BUSS1.3.4 Forecasting cash flows

16. What are the contents of a Business Plan?
The Market
Market size and growth
Competitors and how you can take market share off them or attract custom in a growing market
Target market – is it a niche or mass?
BUSS1.3.4 Forecasting cash flows

17. What are the contents of a Business Plan?
Marketing Strategy and Sales
The marketing mix
- price, product, promotion, place
Sales methods
Skills of the entrepreneurs
What skills and experience do you and your team possess. How will you motivate, train and recruit a workforce?
BUSS1.3.4 Forecasting cash flows

18. What are the contents of a Business Plan?
Operations
Location
Production facilities
Management information systems
Information Technology (IT)
Financial Forecasts
Cash flow forecast
Forecast profit and loss
Sales forecast
BUSS1.3.4 Forecasting cash flows

19. The nature and importance of cash flow
Watch the following clip about Rachel Lowe and her visit to the Dragon’s Den
Was there potential for Rachel to avoid cash flow problems? What actions allowed her to successfully establish Destinations – the taxi cab game which the Dragon’s dismissed.
BUSS1.3.4 Forecasting cash flows

20. MULTIPLE CHOICE □ A Bank loan □ B Overdraft
Jan (£)
Feb (£)
Mar (£)
Cash inflow
(a)
8000
12000
Cash outflow
8500
9000
(c)
Net Cash Flow
(1500)
(b)
2000
1. Use the table to calculate (a)-(c)
2. What is the most appropriate way to deal with the negative cash flow in January
□ A Bank loan
□ B Overdraft
□ C Sell shares to friends and family
□ D Increase sales revenue
1. (a) 7000 (b) (1000) (c) B
BUSS1.3.4 Forecasting cash flows 20