CASH FLOW FORECASTING Flashcards
What is cashflow
Cash flow: The movement of the money into and out of a business over a period of time
How can money come into a business
Sales revenue
Equity capital - Shareholders investing the company, owners putting more funds into the business than their own savings
Debt capital - From bank loans etc
How can money leave a business
Start up costs
Running costs - Wages, electricity etc
Fixed costs
Variable costs
What are cash inflows
Predicted cash sales appear in the month that are predicted to occur
Credit sales are included in the month in which the payment is expected to be received
Cash from other sources (like loans/ share capital)
What are cash outflows
Cash payments appear in the month of a purchase
Credit payments appear in the month that they are paid
What is net cash flow
The balance of a month’s total cash inflows in relation to the month’s total cash outflows
What is the formula for net cash flow
Cash inflows - cash outflows
What is the opening balance
The amount of money left at the end of the previous period to the next period. I.I last month’s closing balance
What is the formula for opening balance
Formula = Previous month’s closing balance = following months opening balance
What is a closing balance
The closing balance on a cash flow forecast is the amount of money/ cash left at the end of a period. It becomes the following month’s opening balance
What is the formula for closing balance
Formula = Previous month’s closing balance = following month’s opening balance
Extra information
Sometimes you may get the opening balance first
You would put cash inflows on the month or year you’re expecting to get them
Cash outflows - you would record the cash that’s leaving the business
Net cash flow: If there is more money leaving the business than coming in, then you’ll get a negative number - if you get that then you will express the number in brackets
Opening balance - How much cash did this business have at the beginning of the month before it started adding cash inflows
Closing balance - How much money the business has ended the month with
The opening balance is equal to the previous months closing balance
Why create cash flow forecasts:
To identify cash flow problems in advance
To ensure a business has sufficient working capital to operate (pay wages, suppliers etc
Take action to mitigate potential problems
Show good financial management or gain investment - An investor may view a business that has practised cash-flow forecasting as a good organisation to invest into
Ensure that the business doesn’t have too much cash hanging around that doesn’t do anything
Essentially, to ensure it has enough liquidity to survive
