3.7 Flashcards
Cashflow Forecast
A visual aid that shows the expected cash a business expects to receive and pay out in a period of time
What is included in a cashflow forecast?
A) Opening balance
B) Cash inflows
C )Cash outflows
D) Net monthly cash flow (B – C)
E) Closing balance (A + D)
Net monthly cash flow
Cash Inflows - Cash Outflows
Closing Balance
Opening Balance + Net monthly cash flow
Improving cash inflows
- Increase cash sales
- Improve credit terms - e.g. reduce trade credit to customers from 60 to 30 days)
- This will mean they collect revenue quicker
- Any of the sources of finance we studied
- E.g. Debt Factoring
- E.g. Bank Loan
- Initial large positive inflow (Cash Inflow)
- A series of negative outflows (Cash Outflow)
Reducing Cash Outflows
Delay payments to creditors - e.g. ask to increase trade credit to suppliers from 30 to 60 days
Delay spending on capital equipment
Rent/Lease rather than buy
Cut unnecessary overheads
Don’t pay staff ☹
TJ Advice:
- Be careful suggesting “Reduce Marketing expenditure” to improve cash flow
- This may also cause sales to decrease
Cash Flow Vs Profit
Why is cash flow different to profit?
- Because of different timing of cash in and out
- A profitable business can have negative net cashflow
Working Capital
The relationship between investment, profit and cash flow
AO2
Business investment
- Spending on projects, new factory, R & D, market development, acquisitions
Profit
- Investments should lead to higher future profit
Cash
- Large outflow at the beginning
- Followed by regular small cash inflows
- Business should use a Cashflow Forecast to make sure they have enough cash to cover their costs
Causes of Cash Flow problems
Expanding too quickly
Allowing too much credit
Poor credit control
Lack of planning
