10. Cash Flow Flashcards
Why are cash flow forecasts used?
Must ensure they had enough cash to pay off staff wages and bills when they are due
One way to help is by planning ahead through a cash flow forecast
How do you interpret cash flow forecasts?
Cash inflow = receipts eg. Cash sales
Cash outflow = payments eg. Wages
All estimated as they have not occurred yet
Shows cash flow of a business month by month
If it’s negative more cash has flown out than in
How is net cash flow calculated
Net cash flow = total cash inflows - total cash outflows
Constructing cash flow: what are opening/closing balances ?
Opening balance: the amount of cash business has at the beginning of the month
First month of forecasts: amount business has left over competition tracking record
Closing balance: opens for next month
Net cash flow + opening balance
Constructing a cash flow forecast: cash inflows
Cash from cash sales
Cash from credit sales
Interest received from bank
Cash from sale of business assets
Constructing a cash flow forecast: cash outflows
Includes all payments business plans to make each month including payments for utilities
What is the use of cash flow forecasts
Identify the timing of cash shortages (negative) and cash surpluses (positive)
Supporting applications for finance
Enhancing planning process
Monitoring cash flow
Identify the timing of cash shortages (negative) and cash surpluses (positive)
Identify in advance when business may borrow money in forms of overdraft / short term loans.
Supporting applications for finance
—> banks will ask for business plan including this statement to support applications —> will help indicate future outlook of business
Enhancing planning process
Careful planning crucial as it helps clarify aims/helps improve performance (helps business avoid problems)
Monitoring cash flow
By the end of the financial year business should make comparisons between predicted and real cash flow figures and identify reasons why —> helps business control its cash flow
What are the limitations of cash flow forecasts?
Based on estimates
Subject to external factors
Time consuming
Focus is on one factor
Why is cash flow forecasts being based on estimates a limitation?
Difficult to predict future revenue/cost of sales due to it depending on amount of sales
How is cash flow forecasts being subject to external factors a limitation?
Include interest rates, exchange rates, competition, change in consumer tastes etc all will affect business cost and revenue
How are cash flow forecasts being time consuming a limitation?
Business owner/manager will spend a lot of time gathering information/creating forecast. Could affect process of meeting customer needs and producing high quality products
How are cash flow forecasts focusing on one factor a limitation?
Cost of making products in the cash outflow. however other factors/aspects affect the production
