Cash flow forecasting/working capital

Question 1

Why is cash flow important?

Answer 1

Cash flow is a dynamic and unpredictable part of life for most businesses (particularly start-ups and small businesses)​

Cash flow problems are the main reason why a business fails​

Regular and reliable cash flow forecasting can address many of the problems​

Question 2

What are the main kinds of cash flow?

Answer 2

Inflows:
cash sales
receipts from trade debtors
sale of fixed assets
interest on bank balances
grants
loans from bank
share capital invested

Outflows:
payments to suppliers
wages and salaries
payments for fixed assets
tax on profits
interest on loans and overdrafts
dividends paid to shareholders
repayment of loans

Question 3

Why produce a cash flow forecast?

Answer 3

Advanced warning of cash shortages

Financial control

Provide reassurance

Spot problems with customer payments

Make sure business can pay suppliers and employees

Question 4

What is the key to having an effective cash flow forecast?

Answer 4

Good information

updated regularly
makes sensible assumptions
allows for unexpected changes

Question 5

What is a cash flow problem?

Answer 5

When a business does not have enough cash to be able to pay its liabilities

Question 6

What are the common problems with cash flow forecasts?

Answer 6

Sales prove lower than expected​:
Easy to be over-optimistic about sales potential​
Market research may have gaps​

Customers do not pay up on time​:
A notorious problem for businesses, particularly small ones​

Costs prove higher than expected​:
Perhaps because purchase prices turn out higher​
Maybe also because the business is inefficient​

Imprudent cost assumptions​:
A common problem for a start-up​
Unexpected costs always arise – often significant​