Cash flow forecasting

• Cash flow forecasting


  Predicting the future cash inflow and outflow of a business
• Cash flow forecasting


  1. Recording the cash payments expected to be received by the business

  2. Recording the cash payments expected to be made by the business
• The importance of cash flow is that a firm can't pay workers, suppliers, landlord etc. without cash
• Cash received by a business


  • From customers
  • From debtors
  • From bank
• Cash payments made by a business

  • To employees
  • To suppliers
• Cash flow forecasting is important for starting up a business, running an existing business, keeping the bank manager informed, and managing cash flow
• New firms can plan ahead, growing firms can prepare to manage new volumes of cash flow, and firms with erratic sales can manage months with low cash inflow using cash flow forecasting
• Ways to improve cash flow

  • Reduce stock
  • Increase credit from suppliers
  • Reduce credit to customers
  • Increase sales revenue
• Elements of a cash flow forecast

  • Receipts (predicted sales revenue)
  • Payments
  • Opening balance
  • Closing balance
  • Net cash flow
• Return on capital employed (ROCE)


  A popular financial metric that helps measure the profitability of a business in relation to the capital it has employed
• Cash flow forecasts are required when applying for a bank loan
• Reasons a business may have cash flow problems

  • Increase bank loans (interest payments)
  • Expand the business
  • Delay payments to suppliers (decreases cash position in short run)
  • Ask debtors to pay more quickly (increases cash in short run)
  • Delay or cancel purchases of capital equipment
• Working capital


  The cash needed by businesses to pay day-to-day expenses, in the form of cash, debtors, and inventory
• The formula for working capital is current assets minus current liabilities