cash flow forecasting

• what is a cash flow forecast is.

  It is a prediction/estimate of the movement of cash into and out of a business over a period of time.
• Explain what a cash flow is with 3 supporting examples.

  • 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 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

  A potentially profitable business may fail because it has cash flow problems 
• What is net cash flow and how is it calculated?

  • The net result of cash inflows and cash outflows each month
  • Net cash flow = cash inflows – cash outflows
• examples of cash inflow

  • Sales revenue
  • Payments from Debtors
  • Sale of assets
  • Owners invested capital 
  • Bank loans
  • Grants
• examples of cash outflow

  • Purchasing stock
  • Paying wages/salaries
  • Paying debts – bank loans, creditors
  • Insurance
  • Utilities
  • Purchasing assets
  • Tax
• 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
• Total Inflow

  •  cash sales appear in the month of sale
  •  credit sales (receivables)appear in month of cash receipt
  •  cash from other sources e.g. loan, investment
• Total Outflow

  • cash out for purchases and payments
• Net Cashflow

  • The net result of cash inflows and cash outflows each month
  • Net cash flow = cash inflows – cash outflows
• Closing Balance

  • How much the business has at the end of each month
  • Calculated as: Opening balance + net cash flow
• Cash Flow Problems

  • Businesses need to have sufficient cash to meet day to day finances
  • Buying stock
  • Paying wages
  • Utility bills
  • Insufficient liquid cash funds may mean an inability to meet short term debts
  • Bank overdraft
  • Payables (trade creditors)
  • Limited cash may result in missed opportunities
  • A key consideration should be whether the cash flow problem is short term or long term
  • A firm may be able to survive short term cash flow problems
  • Long term cash flow problems may be insurmountable
• Causes of Cash Flow Problems

  • Excessive Stocks

  Pay for raw materials

  Storage costs of excessive stock

  Additional security costs
• Causes of Cash Flow Problems

  • Overtrading

  Additional overhead and day-to-day expenses – raw materials/wages

  Increased capital expenditure – purchasing machinery
• Causes of Cash Flow Problems

  -Excessive Trade Credit

  Have you go the money to pay back your trade credit

  If you offer it, what are your terms of payback – monitor your credit control
• Causes of Cash Flow Problems

  -Excessive Borrowing

  Affordability – can you pay it back easily

  Impact on relationship with suppliers
• Causes of Cash Flow Problems

  -Poor Planning

  Poor or inaccurate planning – being unrealistic

  If you can‘t afford it then shouldn’t have it
• Causes of Cash Flow Problems - External Factors

  Seasonality

  Access to raw materials – Covid/War
• But a poor Cash Flow can mean BIG PROBLEMS for a business

  • Poor cash flow means there is not enough cash in the business to meets its day-to-day expenses – there is a lack of working capital.
  • Staff may not get paid on time – this will cause resentment and poor motivation.
  • Some suppliers offer discounts for prompt payments of invoices – the business will not be able to take advantage of these.
  • Creditors may not get paid on time – they may insist on stricter terms in future.
  • Some creditors may not wait for payment – they might take legal action to recover the debt. If the business does not have the money, it may be declared bankrupt and forced to cease trading.
• Ways to improve Cash Flow - Reduce stock levels

  Reducing money tied up in stock

  Need reliable stock deliveries
• Ways to improve Cash Flow - Factoring

  • Immediate payment of debt
  • Reduced risk of non payment (bad debt)
  • Factor house takes a % as their profit
  • May alter customer’s image of business
• ways to improve cash flow - improve credit control

  The process of chasing payments from debtors (people who have bought from you on credit)

  • Brings cash into the business
  • Full amount received
  • May alienate customers
  • Administratively demanding
• ways to improve cash flow - reschedule payments

  Slowing down the timing of the outflow of cash:

  • Loan repayments
  • Day to day running expenses
  • Interest payments
• ways to improve cash flow - sell fixed assets

  Sell off items that are not being used to raise extra income
• ways to improve cash flow - Extend trade credit

  • Negotiating longer payment terms
  • May incur penalties
  • Need to maintain positive relationship
• advantages of a cash flow forecast

  • Identifies the timings of cash shortages and surpluses e.g. if there is a predicted shortage an overdraft facility can be sought
  • Supports application for funds – as part of a business plan
  • Subsequently will allow the monitoring cash flow by comparing predicted figures with actual figures in cash flow statement
  • Helps with budgeting
  • A key planning document for future developments
• disadvantages of a cash flow forecast

  • They are time consuming to prepare
  • They could become irrelevant if circumstances change
• The Golden Rules of Cash Flow

  • Money is only recorded when cash changes hands
  • It tells us NOTHING about profit [a profitable business can have a poor cash flow, and still go bankrupt
  • The closing balance of one month is the opening balance of another month
  • A negative closing balance DOES NOT mean that the firm is bankrupt!