Cash flow forecast Flashcards
Cash flow forecast
Is a document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months.
Inflows/receipts
are the money coming into the business from various sources
Types of inflows
- cash sales - customer pays at the time of purchase.
- credit sales - customers pay in a pre agreed period after the sale.
- loans - bank loans to fund purchases.
- capital introduced - money invested from entrepreneurs or shareholders when a business is first set up or looks to expand.
- sale of assets - sale of items owned by the business which are no longer needed in order to bring a short term cash injection.
- bank interest received - interest paid by the bank on credit balances.
Outflows/payments
Cash outflows or payments are the money going out of the business for various purposes.
Types of outflows
- cash purchases - item purchased by a business and paid for at the time of purchase.
- credit purchase - items purchased by a business and paid for at a later point.
- purchases of assets - non-current assets that a business is likely to keep for more than one year such as machinery and cars.
- Value Added Tax(VAT) - businesses that are VAT registered must pay VAT to HMRC and should be shown in cash flow forecast.
- bank interest paid
- rent
- rates
- salaries
- wages
- utilities
Opening balance
how much money a business has at the start of the month
Closing balance
how much money the business has at the end of each month
net cash flow formula
inflows - outflows
closing balance formula
opening balance + net cash flow
What two influences does credit periods have on a businesses cash flow?
- business must consider how long it gives it customers to pay, the longer a credit period the slower will be the money coming in.
- affects the ability of the business to gain credit from suppliers. If a business secures suppliers on credit it will reduce cash flow out of business. The longer the credit period the later the cash flows out. So, if a business both sells and buys on credit from suppliers it needs the first to have a shorter credit period then the second.
What is a key purpose of cash flow forecasts?
Is to highlight in advance any months where there is a risk of a negative cash flow as this allows the business to make arrangements e.g. a pre-arranged overdraft.
What does it mean to have a negative closing balance?
A business is said to have liquidity problems and is at danger of becoming insolvent.
Problems with cash flow forecasts
Problems occurs when outflows are greater then opening balance plus the inflows, as will result in a negative closing balance. This means the business will not have enough cash to meet repayments that are due.
Solutions to cash flow problems - Overdraft
a business with fluctuating cash flow cycle should be able to show the forecast to the bank and make arrangements for periods of negative cash flow.
Solutions to cash flow problems - Negotiating terms with creditors
a business could try to negotiate a longer payment term with its suppliers, this would slow down flow of cash out a business, however, there is a loss of any discounts offered for prompt or early payments.
