Cash flow forecasts Flashcards
What are cash inflows
money coming into the business
What are cash outflows
money going out of the business
What do cash flow forecasts show
opening balance, cash in, cash out, and closing balance
What is the opening balance
the money in the business at the start of the month
What is the closing balance
the amount of money at the end of the month
What is the equation for closing balance?
opening balance + net cash flow
What is the equation for net cash flow?
cash inflow - cash outflow
What are the benefits of cash flow forecasts?
Helps the business track and plan cash inflows and outflows, and enables cash flow to be monitored and correct action to be taken if necessary
What are the limitations of cash flow forecasts?
It is a prediction so may be inaccurate, and the business cannot plan for unexpected events (rise in the cost of raw materials)
What problems can occur within a cash flow forecast
If the outflows are greater than the inflows, this results in a negative closing balance. The business therefore does not have enough cash to meet payments
Solutions to cash flow problems
overdraft arrangements, negotiating terms with creditors, reviewing and rescheduling capital expenditure
How can overdraft arrangements help cash flow problems
Banks may offer free overdraft facilities to help businesses through negative cash flow periods.
How can negotiating terms with creditors help cash flow problems
Attempt to negotiate longer payment terms to slow down cash outflows
How can reviewing and rescheduling capital expenditure help cash flow problems
Areas of expenditure could be cut or postponed
