Cash flow forecasts Flashcards
What do cash flow forecasts show (Breif)?
Cash inflows and outflows
What are cash inflows?
The sums of money received by a business.
What are cash outflows?
The sums of money paid out by a business.
What is working capital?
The amount of cash that a business has available for their day to day expenses.
Why may smaller businesses struggle to maintain good levels of working capital?
Because they probably have high start up costs before receiving any revenue/ profits.
Why is maintaining a good level of working capital important?
Because in order to produce and sell products there are costs that come before that, they must be able to pay to produce a product before receiving the money from it; to do this consistently, they need good working capital.
Why may a business not immediately receive inflows from selling their products?
Especially with B2B trading, a business may offer credit to a customer (or trade credit if it is B2B), meaning even though they have sold the product they do not immediately receive the cash for this and may have to wait an agreed period of time for said cash.
What are people who owe a business cash called? And what is the term for the money that the business is owed?
Debtors and receivables.
What are people who are owed money by a business called, and what is the term for the money that a businesses owes another business?
Creditors and payables.
Why are cash flow forecasts important?
With many cash inflows and outflows at different times for a business, they need a procedure in place to ensure they do not run out of cash, cash flow forecasts aim to prevent this.
What do cash flow forecasts show (detailed.)
The amount of cash managers expect to flow in and out of a business over a period of time in the future.
How do established firms make their forecasts?
They use past data and experience.
How do newer firms with little to no experience make forecasts?
They should consider the businesses capacity and experiences of similar firms and customer trends shown by market research. Doing so should give an indication of how many sales they will make thus what their inflows will be, as well as being able to calculate their variable costs and fixed costs (looking at capacity.) If they can ascertain how much they are likely to sell they can work out how much will likely come in and out over different periods to ensure they have sufficient cash supplies to operate.
What do managers use these for?
To ensure they have sufficient cash stores to pay their suppliers and employees (and other variable costs where relevant). Doing so means they can plan where they will be short on cash and may require measures such as a loan or overdraft.
Why are these included in business plans?
Sources of finance will want to see these when deciding to finance a business and interest rates - they prove that business owners have done their research and have an idea of where the business will be in the future, making sources of finance more secure.
