CASH FLOW FORECASTING

• What is cash flow?

  a flow of money into and out of a business
• What does it mean when something is called liquid?

  an asset that is easily changed into cash
• What is overheads?

  money spent regularly on rent, insurance, electricity and other things that are needed to keep a business operating
• What does insolvent mean?

  the inability to meet debts
• What is a cash flow forecast?

  a prediction of all expected receipts and expenses of a business over a future time period, which shows the expected cash balance at the end of each month
• Why is cash important?

  • to pay suppliers, overheads and employees
  • to prevent business failure
• What are some differences between cash and profit?

  • some goods are sold on credit meaning that customers have not yet paid for the goods the business has sold
  • owners might put more cash in the business, increasing cash balance, but having no effect on the profit made
  • the amount of cash at the end of a period will be different from profit because at the beginning of the year the cash balance is unlikely to be zero
• What is cash inflow?

  a flow of money into a business
• What are some examples of cash inflows?

  • sales revenue
  • loans
  • fresh capital
  • interest and sales of assets
• What is cash outflow?

  a flow of money out of a business
• What is net cash flow?

  the difference between cash inflows and cash outflows. It is hoped to be positive, meaning that more cash flows in the business than out
• What are drawings?

  money taken out of the business by the owner for personal use
• What is a closing cash balance?

  the amount of cash that the business expects to have at the end of each month (taking into account the cash inflows and outflows)
• What are cash flow forecasts important for?

  • identifying cash shortages
  • supporting applications for funding
  • help when planning the business
  • monitoring cash flow