2.2.1 Cash flow forecasts/sales forecasting

Question 1

Cash flow forecast

Answer 1

a financial document showing projected inflows and outflows of cash into and out of a business

Question 2

Benefits of producing a cash flow forecast

Answer 2

• to look at the liquidity of a firm
• budgeting - cost budgets and revenue budgets
• budgeting is part of a business plan to access finance
• helps to plan liquidity to avoid cash flow shortages - without cash a business may fail

Question 3

Which stakeholder groups would look at a cash flow forecast?

Answer 3

• shareholders
• bank
• creditors - people you owe money to
• suppliers
• potential investors

Question 4

What are the limitations of a cash flow forecast?

Answer 4

• based on assumptions
• may go out of date - only a 12 month snapshot which is very short term to make an concrete decisions
• unexpected external factors
• may be over optimistic and over estimate cash flows
• only as good as the information used to produce - historic/zero-based
• to get a full picture the business would need to show a balance sheet and the profit and loss income statement

Question 5

How can a business improve its cash flow position?

Answer 5

• change payment terms from customer that you sell to on trade credit
• change payment terms from suppliers/creditors
• liquidate its assets
• re-schedule short term debts
• spread payments

Question 6

What is meant by opening balance and how is this calculated?

Answer 6

calculate from the closing balance from the previous month

Question 7

What is meant by closing balance and how is this calculated?

Answer 7

net cash flow + opening balance

Question 8

What is meant by net cash flow and how is this calculated?

Answer 8

inflows-outflows

Question 9

Sales forecast

Answer 9

a sales forecast is a prediction of the future value of sales made by a business in a time period

Question 10

Purposes of a sales forecast

Answer 10

• plan operation - capacity management, stock management, staffing
• to create budgets and targets - can used to motivate
• to create a cash flow forecast
• helps to consider promotional budgets
• to decide if a product is viable or not

Question 11

External factors that affect a sales forecast

Answer 11

-economic state, interest rates, consumer confidence, unemployment - can impact demand
-seasons
-consumer trends
actions of competitors
-changes in regulations and laws
-demographics
-technology
-environmental changes

Question 12

Difficulties of sales forecasting

Answer 12

• uncertainty in the external environment that can make it difficult to predict
• can go out of date quickly
• for a new company or product, there is no historical data that can be used - quantitative data needs to be used
• dynamic markets can make it hard as the future may be different from the past

Question 13

Price of elasticity of demand

Answer 13

measures the responsiveness of demand to a change in price

Question 14

Income elasticity of demand

Answer 14

measures the responsiveness of demand to a change in income

Question 15

Inferior and normal goods

Answer 15

Inferior - negative YED (demand increases as income falls)

normal = positive YED (demand falls as income falls)