Cash Flow Forecasts Flashcards
what is a cash flow forecast
cash flow forecast is an educated prediction of what the future cash flow may be like.
It allows the business to identify times when there may be shortages and plan for this by saving money from where there is a surplus.
why are cash flow forecasts so important
allows the business to forecast the money flowing into the business and the money flowing out of the business for a given period of time (usually a year).
they allow a business to pay its stakeholders on time and take corrective action when areas of concern are identified
What are the different inflows of a business
cash sales
credit sales
loans
capital introduced
sale of assets
bank interest received
Define cash sales
sales made in cash or by card that are received by the seller at the time of purchase or delivery
Define credit sales
credit sales are sales where payments are not made until several days or weeks after a product has been purchased.
The buyer is given a period of time after a sale is made to make the payment i.e. 30 days.
Define loans
bank loan is an inflow for the business as they may require the cash to purchase assets such as equipment, vehicle or machinery.
Define capital introduced
when a business owner invests their personal money, stock or assets into the business.
This is most common when a business starts or is expanding
Define sales of assets
method of increasing inflows to the business by selling assets owned by the business for cash to then use within the business
Define bank interest
interest paid by the bank on credit balances.
What are the different outflows of a business
Cash purchases
Credit purchases
Rent
Rates
Salaries
Wages
Utilities
Purchase of assets
Value Added Tax (VAT)
Bank interest paid
Define cash purchases
items that the business purchases and pays for them at the time of purchase.
Define credit purchases
Items that have been bought by a business but then paid for at a later date
Define rent
regular payment made to a landlord usually in exchange for the use of a premises.
Define rates
tax on property used for business purposes.
They’re charged on properties like offices, shops, pubs, and warehouses.
Define salaries
fixed regular payment to an employee.
Salaries are typically paid on a monthly basis but often expressed as an annual sum, made by an employer to an employee, especially in professional industries.
Define wages
Wages are similar to a salary in terms of them being paid to an employee.
However a wage is usually based on hours worked, for example a worker paid a wage may get £10 an hour and those hours of work may vary and so will the pay.
Define utilities
includes your electricity, gas and water usage and costs.
Define purchase of assets
purchase of non current assets that a business is likely to keep for more than a year such as vehicles, machinery, land and property
Define VAT
Business that are VAT registered must pay VAT to HMRC.
Define bank interest paid
interest that is incurred due to borrowing money
How can cash flow forecasts be used for planning
helps identify where most of your inflows and outflows are coming from.
Where these are not adequate it allows the business to put a plan in place to help rectify any cash flow issues.
what are the benefits of cash flow forecasts
Allows the business track inflows and outflows
Helps monitor cash flow and anticipate where corrective action needs to be taken
Can be used as part of a business plan to help secure finance
Track whether actual spending is close to your cash flow forecast
what are the limitations of cash flow forecasts
Based on a forecast therefore could not be accurate
Unforeseen changes can impact the forecast such as a change in material costs.
Sales are significantly lower than expected
Takes time to produce
