Cash Flow Forecasts Flashcards
What is a cash flow forecast?
Predicts the future flow of cash in and out of a business’ bank accounts.
What are the purposes of cash flow forecasts?
• plan
• monitor
• control
• target setting
Why are cash flow problems one of the main reasons why businesses fail?
This is due to cash flow often being dynamic and unpredictable especially for smaller organizations.
What are some examples of cash inflows?
• cash sales
• receipts from trade debtors
• sale of fixed assets
• interest in bank balances
• grants
• loans from banks
• share capital invested
What are some examples of cash outflows?
• payment to suppliers
• wages and salaries
• payments for fixed assets
• tax on profits
• interest on loans and overdrafts
• repayment of loans
• dividends paid to shareholders
• rent payments
What is net cash flow?
The difference each month between cash inflows and cash outflows.
What is the opening balance?
The amount the business starts with each month.
What is the closing balance?
Opening balance + net cash flow
What does a negative closing balance suggest?
That the business needs bank overdraft or additional financing.
A good cash flow forecast…
• is updated regularly
• makes sensible assumptions
• allows for unexpected changes
What are some common problems with cash flow forecasts?
• sales prove lower than expected
• customers do not pay up on time
• costs prove higher than expected
What are the main causes of cash flow problems?
• low profits or losses.
• too much production capacity.
• excess inventories held.
• allowing customers too much credit or too long to pay.
• overtrading - growing the business too fast.
• unexpected changes in the business.
• seasonal demand.
How can too much spending on capacity lead to cash flow problems?
• spending too much on fixed assets.
• made worse if short term finance used eg bank overdraft.
• fixed assets are hard to turn back into cash short term.
How can too much inventory lead to cash flow problems?
• excess stock ties up cash.
• increased risk that stock becomes obsolete.
BUT
• there needs to be enough stock to meet demand.
• bulk buying may mean lower purchase prices.
What’s an example of too much inventory causing cash flow problems?
In 2018, H&M found itself with $4.3billion worth of unsold clothes, that equated to 17.6% of its total sales for the year.
What’s the impact of excess inventory?
• increased storage cost.
• reduced profit margins.
• cash flow problems.
• reputation damage.
How does allowing customers too much credit lead to cash flow problems?
• late payment is a common problem.
• the debt may go ‘bad’.
BUT
• offering credit is a good way of building sales.
How does overtrading lead to cash flow problems?
when a business expands too quickly, it puts pressure on short term finance.
eg retail chains are keen to open new outlets, which brings lots of new costs/outflows as well as potentially increasing inflows.
How does seasonal demand lead to cash flow problems?
• where there are predictable changes in demand and cash flow.
• production or purchasing usually in advance of season peak in demand = cash outflows before inflows.
• this can be managed - cash flow forecast should allow for seasonal changes.
How can you manage cash flow problems?
• make and action reliable cash flow forecasting.
• manage working capital effectively.
• choose the right sources of finance.
What are debtors and creditors?
Debtors are amounts owed by customers.
Creditors are amounts owed to suppliers.
What is debt factoring and how does it work?
• the selling of debtors to a third party.
• this generates cash.
• it guarantees the firm a percentage of money owed to it.
• but will reduce income and profit margins made on sales.
• cost involved in factoring can be high.
