The Cash Flow Forecast

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Harry Arnold
7 years ago
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1 The Cash Flow Forecast A Cash Flow Forecast is a form of budget This is a VERY important business document It will show when cash is expected to flow into and out of a business over a period of time Inflows are money received from customers and other sources Examples Sales of products Capital from the owners Bank Loans Grants Business Outflows are money paid to to suppliers Examples Payment to suppliers Rent and Rates Wages and Salaries Power Advertising Business Studies Online: Slide 1

and other sources Examples Sales of products Capital from the owners Bank Loans Grants Business Outflows are money paid to

2 Cash Inflows This is money that the business receives There are 4 main places that money will come from: Sales revenue received from customers Grants received from government Capital from the sale of assets e.g. machinery Loans received from banks and other lenders Business Studies Online: Slide 2

3 Cash Outflows This is money that the business spends There are 7 main ways that money will be spent: Wages and Salaries to pay for staff Raw materials to make products Gas, electricity, water and telephone needed to run the business Rent and business rates to pay for premises Interest on money that has been borrowed Tax on profits (corporation) and spending (VAT) Equipment used to make products Business Studies Online: Slide 3

to run the business Rent and business rates to pay for premises Interest on money that has been borrowed

4 Why is Cash Flow Important? A business cannot survive without cash Think of a business as a bath without a plug.. The business must make sure that there is always cash available Eg the bath should never be allowed to run empty! Business Studies Online: Slide 4

5 Why Bother with Cash Flow? Banks can see how money is flowing in the business. Businesses can decide if they need to invest more or less Notice that Cash Flow Tells us NOTHING about Profit! Uses of Cash Flow Businesses can decide whether they want to expand or shrink The business can also plan to see if they can cut costs or increase revenue Business Studies Online: Slide 5

6 A Cash Flow Forecast A cash flow forecast is a table that summarises the money coming in and going out Each month has it s own column Each column has 3 parts: Business Studies Online: Slide 6

7 The Sections of a Cash Flow Forecast Receipts (or inflows) is money coming in Payments (or outflows) is money going out Net In/Out Flow is the difference between the 2 Business Studies Online: Slide 7

8 A Worked Example Money In (Revenue) Jan Feb Mar Apr May Jun Months Cash Sales Credit Sales Monthly Income Figures Total Monthly Total Money Out (Costs) Rent Raw Materials Wages Repayments 100 Total Net Flow (400) Bank B/F (400) (300) (100) 600 Balance C/F (400) Monthly Cost Figures Monthly Total Business Studies Online: Slide 8

Raw Materials 200 300 700 400 300 Wages Repayments 100 Total 1600 1700 2 1 1 1700 Net Flow (400) 200 700 750 Bank

9 Golden Rules of Cash Flow Money is only recorded when cash changes hands It tells us NOTHING about profit A profitable business can have 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! Business Studies Online: Slide 9

bankrupt The closing balance of one month is the opening balance of another month A

10 Computers and Cash Flow Many businesses use spreadsheets to produce their cash flow forecast because: Once set up, a cash flow forecast can be produced very quickly Fewer mistakes will be made Figures can be changed very quickly to see what if effects Comparisons with actual data can be carried out very easily Graphs can be used to show the figures visually Business Studies Online: Slide 10

made Figures can be changed very quickly to see what if effects Comparisons with actual data can

11 The Problems of Using Computers It is important to recognise that using a spreadsheet can cause problems, such as: The spreadsheet must be set up accurately before you can start entering data One incorrect formula can have a huge impact on the overall cash flow Staff need computer skills to use them Data can be lost, or become corrupt meaning backups are required Security may also be a problem, since a cash flow forecast is a sensitive financial document Business Studies Online: Slide 11

the overall cash flow Staff need computer skills to use them Data can be lost, or become corrupt meaning backups are

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