2.1.4 Planning

Question 1

What’s a cash flow forecast

Answer 1

A cash flow forecast is a prediction of the anticipated cash inflows and cash outflows, typically for a six to twelve month period (shows financial needs)

Question 2

Net cash flow formula

Answer 2

Total outflows - Total inflows

Question 3

Opening balance

Answer 3

The opening balance is the previous month’s closing balance carried forward

Question 4

Closing balance formula

Answer 4

Net cash flow + opening balance

Question 5

Advantage of cash flow forecast

Answer 5

Cash flow forecasts can support an application for a loan and are an integral part of the business plan

They can help identify where the business may experience cash shortfalls or cash surpluses so that plans can be made to manage these periods (e.g. arranging an overdraft)

Cash flow forecasts aid planning and help a business avoid costly mistakes

Business Angels will analyse whether there is an opportunity to increase the value of their investment and make a worthwhile profit

Question 6

Disadvantage of cash flow forecast

Answer 6

Forecasts are usually based on estimates and in reality inflows and outflows may differ significantly from the estimates

Cash flow forecasts require appropriate skills, insight, research and time to prepare and update adequately

External factors that can impact inflows and outflows may not be reflected in the cash flow forecast