Cash Flow Forecasts Flashcards
What is cash flow?
Flow of money in and out of a business. It is the difference between the receipts from sales and the amount spent on expenses.
Difference between cash and profit
Cash refers to the money in use in the business and is coming in and going out all the time. Not all of that cash will be profit.
Profit refers to the amount of money which is surplus at the end of the trading period when all expenses have been paid.
Purposes of a cashflow forecast
Forward planning - it predicts the level of spending and level of income the business will have. Recording this enables the business to see if these payments would result in cash shortages.
Review performance - enables a business to compare the forecasted income and spending against actual amounts spent and received.
Shows when finance is required - business can see from a cashflow forecast how much money needs to be borrowed for something and this prevents interest going longer than necessary.
Importance of a cashflow forecast
An even cash flow ensures the business would never suffer from a shortage of ready money.
The business must ensure that there is a steady supply of money coming in so that it is able to pay its essential debts.
Without adequate cash flow the business could be forced to close because suppliers would no longer trade with a business.
Consequences of incorrect forecasting
Cause a shortage of working capital, working capital is used to pay for the day to day running of the business and a shortage would mean not being able to pay for the essential running costs.
Inventory levels may be inaccurate, if sales revenues were under estimated, sufficient inventory may not have been purchased.
Bank loans may be required. These would incur high interest charges.
