1. Using Cash Flow Forecasting

2. Lesson Objectives The nature of cash flow How to forecast cash flow
The structure of a cash flow forecast
Why businesses forecast cash flow
Try a past paper question

3. 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.

4. 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

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

6. 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

7. How to forecast cash flow – a prediction of the monthly inflows and outflows
Cash inflows
Owner’s Investment or other source of finance
probably month one only – figure should be known
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
What is expertise of entrepreneur?
How have estimates been calculated?
Is it a new product or service?
How might competitors react?
Debtor payments estimated from sales forecast
Determined by credit terms offered to customers
Will debts be paid on time?
How good is firm’s credit control?

8. 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 month by month basis
Time delay between estimates and signing contract etc can cause inaccuracies
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 charged
Unforeseen expenses
Or just forgotten expenses! A new entrepreneur may find it difficult to even perceive all the costs never mind 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

9. The structure of a cash flow forecast
Cash Inflows shows:
cash in from sales
cash sales appear in the month of sale
credit sales (debtor payments) appear in month of cash receipt
cash from other sources e.g. loan, investment
Cash Outflows shows:
cash out for purchases and payments
Cash payments appear in month of purchase
Credit payments appear in month of cash outflow
E.g. Phone usage – line rental paid each month, call charges every 3 months
Net cash flow
The net result of cash inflows and cash outflows each month
Net cash flow = cash inflows – cash outflows
Opening balance
How much the business has at the start of each month
For a new business in month 1 this will be 0
The closing balance for one month becomes the opening balance for the next
Closing balance
How much the business has at the end of each month
Calculated as:
Opening balance + net cash flow

10. The structure of a cash flow forecast
The structure of a cash flow forecast cash flow forecast for first 4 months of Tap It Plumbers
Jan
Feb
Mar
Apr
Cash Inflows
Owner’s Capital
5000
Cash Sales
1600
2000
2500
Payments by debtors
400
500
Total Inflows
6600
2400
3000
Cash Outflows
Van Lease
700
Materials
2800
800
1000
Wages
Other expenses
450
Total Outflows
4950
2950
3150
Net cash Flow
1650
(550)
(150) 50
Opening balance
1100
950
Closing balance

11. 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

12. Let’s try a past paper question and see how that goes...

13. Task: look at this information taken from a past paper, it doesn’t show profit, to does show a problem at the end of one year can you spot it? What else can you see from the data? Can you extrapolate forwards to help you decide which option would be better – assume that inflows and outflows remain constant?

14. Overdraft = cash flow question (most likley)
Here’s how the question looked on the paper – notice that it doesn’t wave
A flag and say hey hey I’m a cash flow forecasting question, no you have
To work that out as well! Welcome to A Level :0)
Overdraft = cash flow question (most likley)

15. Total of 10 marks for this question – no evaluation required so don’t do one!

16. This is taken from the examiners mark scheme – what they use to mark your answers: Always include a definition at the start of all your answers, its just polite, like shaking someone's hand when you meet them formally, see picture below for guidance :0)

17. Here’s the answer in all its glory, worth making a mindmap of the keypoints

18. Here is an example of the kind of great mindmap that you could make.