1. Cash Flow Forecasting

2. STARTER
Think about the bill payer in your household. What things need to be paid each month?
How are those bills paid for?

3. What this topic is all about
Cash flow is a dynamic and unpredictable part of life for a start-up
Cash flow problems are the main reason why a new business fails
Cash flow forecasting looks at why and how a start-up should prepare regular forecasts

4. Why cash flow forecasting is important
Cash is king – it is the lifeblood of a business
If a business runs out of cash it will almost certainly fail
Few start-ups have unlimited finance – cash is limited, so it needs to be managed carefully

6. Cash flow forecast - illustrated
Forecast is normally produced by month
Jan
Feb
Mar
Total
CASH INFLOWS
Investment
10,000
Sales
2,500
15,000
27,500
Total inflows
12,500
37,500
CASH OUTFLOWS
Raw materials
4,000
5,000
14,000
Wages & salaries
3,500
11,500
Marketing
1,000
2,000
5,500
Set-up costs
3,000
Other costs
Total outflows
12,000
39,000
NET CASH FLOW
-2,500
-2,000
-1,500
Opening balance
-4,500
Closing balance
NET CASH FLOW=
CASH INFLOWS MINUS
CASH OUTFLOWS
Opening balance is the amount the business starts with each month
CLOSING BALANCE=
OPENING BALANCE PLUS
NET CASH FLOW

7. Reasons to produce a cash flow forecast
Identify potential shortfalls in cash balances in advance (important)
Make sure that the business can afford to pay suppliers and employees
Spot problems with customer payments
As an important part of financial control
Provide reassurance to investors and lenders that the business is being managed properly

8. Why start-ups are vulnerable to cash flow problems
It can be a while before the business makes its first sales – the pre-trading period often involves incurring costs without getting any revenue in return
Suppliers may demand immediate or early payment from the start-up as the business has not developed a track record for paying bills on time
A new business usually has to spend up-front on expenses such as marketing and product development
The new business will not have reserves of cash built up from profitable trading – an important source of cash known as “retained profits”

9. Sources of information for a cash flow forecast
Entrepreneur experience
Industry experience can prove vital
Otherwise, it forecast has to include “gut feel” assumptions (dangerous)
Market research
A crucial role – typical payment terms for customers, suppliers
Reflect seasonal peaks and troughs in demand
Helps identify potential costs
Suppliers
Very useful source of industry information
Advisers
Great for helping put the forecast together
Can challenge the assumptions made
Can check that the forecast is complete and accurate

10. What the cash flow forecast contains
Cash inflows (into the business)
Movements of cash into the bank
Receipts from customers
Investment by the entrepreneur
Loans from the bank or others
Cash outflows (out of the business)
Payments to suppliers (materials, equipment, premises)
Payments to employees (wages & salaries)
Payments to lenders (e.g. interest, loan repayments)
Payments to shareholders (dividends)

11. Common problems with cash flow forecasts
Sales prove lower than expected
Easy to be over-optimistic about sales potential
Market research may have gaps
Customers do not pay up on time
A notorious problem for small businesses
The cost of production proves higher than expected
Perhaps because purchase prices turn out higher
Maybe also because the business is inefficient
Certain costs are not included
A common problem for a start-up
Unexpected costs always arise – often significant

12. Improving the Cash Flow
Arrange an Overdraft
Buy and hold fewer stocks (eg. Just in Time – JIT)
Credit Control – allow customers less time to settle their bills
Spread large payments over a longer period of time
Selling Assets (eg. Machinery or other equipment)
Extend Trade credit from suppliers