cash flow forecast Flashcards
what is a cash flow forecast
a cash flow forecast is a estimate of inflows and outflows of cash into and out of a business over a specific time period in the future
also predicts how much cash is needed to keep the business running and hoe much will be avaliable
they can be very unpredictable and change due to uncontrollable factors therefore they must be kept up to date and tracked and re calculated over short time frames
if businesses can regually and reloably create accurate cash flows this avoids and liquidity issues and any issues that could lead to failure
net cash flow formula, how to calculate closing balence
net cash flow = inflows- outflows
closing balence= opening balence+ net cash flow
total sales receipts=total payments + NCF
why are cash flows completed
to ensure that the business has enough cash to complete day to day activities e.g. suppliers and emplyees
to ensure there is sufficient cash for any projects upcoming and if not this can be acted on in advance e.g. getting external sources of finance
ensures less harm if external shocks occur
any cash shortages can be identified and delt with before becomes an issue
provides reassurance to investors, suppliers and banks that the business has control over finances, well managed and is in a good financial stable position meaning they are more likely to be able to access external sources of finance e.g. loan, share capital, trade credit
reasons why there can be issues with cash flow
- overtrading/ over investment , business growing too quickly unable to fund this rapid growth e.g. new locations, staff without avaliable funds- working capital- to do so
- overstated inflows/ understated outflows- inaccurate predictions of money flowing in and out of business
- predictions are often based on previous years which may not be accurate as dynamic markets changing trends fashions very quickly as well as economic climate, comeptition forecasts may differ from pervious although sometimes this is hard to predict
- unexpected events/ eco conditions increasing costs
- seasonality- may change demand
- slow consumer payments
- overspending e.g. on marketing
- poor fiancial planning/ unrelaistic
impacts on business if doesnt control cash flow efficiently
If this is not controlled, i.e., if the money flowing out of the business exceeds the amount
coming in (the net cash flow is negative) for any length of time there can be serious
consequences for the business.
The owner(s) may not be able to pay themselves a reasonable salary (drawings).
The business may not be able to pay the wages of its staff (if it has any) which could
lead to industrial action and stoppages.
The business may not be able to pay its suppliers, in which case the suppliers will stop
supplying them and production will come to a halt.
The business may not be able to pay its rent (or mortgage) which could result in it being
evicted.
The business may not be able to pay its rates and/or other taxes, in which case it is likely
to be prosecuted and eventually wound up.
The business may not be able to afford to advertise which would result in loss of
business or the failure to gain new customers, which in the long term will affect the future
of the business.
Similarly if the business is no longer able to repay the interest and capital on any loans
that it has it may face court action and, ultimately, receivership.
Banks may be unwilling to lend if there are serious cash flow problems
Any other valid point.
strategies to improve cash flow shortages
- decreasing costs
for example cutting spending in areas not neccisary for example reducing marketing budget….. although this could limit the growth of the business, cuttign costs and improving liquidity in ST could harm LT growth of business
could also reduce labour costs by making redundacies… high redundacy patments, could recieve backlash from public/ trade unions
changing to cheaper suppliers… although may sacrafice quiality
- increasing revenue
prehaps implimenting discounts/ promotions to attract more customers…. may have a time lag and lower profit margins
increasing prices… although could lead to decreased demand ( depends on PED )
Increasing distribution channels, access to more customers, although high costs likely to worsen liquicity position / cash flow
- external sources of finance
prehaps seeking a bank loan… fixed ST liquidity issues although reduces profit margin in long term as have to pay back more
factoring, selling invoices to third parties, immediate cash… although fees have to be paid
overdraft, good for ST liquidity although must have good account history otherwise not accessable
delay payment from suppliers…. miss out on discounts, have to pay eventually 30-90 days and may lead to delayed deliveries- customers disappointed , may strain relaitonship with supplier
advantages of using a cash flow forecast
- allows managers to plan ahead if there seems to be any issues with cash flow and avoid going into debt - allowing for better decision making
- allows business to see how business is performing in terms of net cash flow if its poor or strong - doesnt provide accurate statment of profitability tho
- more attractive to banks if can see have financial control and stability meaning more able to have access to external funding
- can plan ahead for any + cash flow periods and plan to invest for e.g growth
disadvantages of using a cash flow forecast
- hard to predict any ecternal influences which could completely change the actual cash flow position from the forecast
- doesnt guarantee success must be regually adpated and redone
- depends on accuracy/ reliability of forecast, skills and experience of person calculating… if a new business this may be much harder
- could be over optimisitic leading to poor financial decisions such as overspending when not appropriate
- if have little trading history may be much harder to calculate accuratley
