Cash Flow Forecasts Flashcards
Cash Flow Forecast
A document that shows the predicted flow of cash into and out of a business over a given period of time
It aims to ensure the business stays solvent (doesn’t go into debt)
Cash Inflows/Receipts
The money coming into the business from various sources
E.g. cash sales, credit sales, loans
Cash Outflows/Payments
The money going out of business for various purposes
E.g. credit purchase, salaries, bank interest paid, rent
Opening Balance
Amount of cash available in a business at the start of a set time period, e.g. a month
Closing Balance
Amount of cash available in a business at the end of a set time period e.g. a month
A business with a negative closing balance is said to have liquidity problems and is in danger of becoming insolvent
Closing Balance Formula
opening balance + cash inflows – cash outflows = closing balance
Credit Period
The length of time given to customers to pay for goods or services received
The longer the credit period, the slower will be the money coming in
Liquidity
Measures a firm’s ability to meet short term cash payments
Insolvent
When a firm is unable to meet short-term cash payments
Use Of Cashflow Forecasts
- Useful for planning, monitoring, control and target setting
- Helps identify where there are potential shortfalls but might also indicate where there are large amounts of cash left at the end of a month or year
- Is the cash balance at the end of each month is high it can indicate that the business is not taking advantage of opportunities
- E.g. the cash surplus can be used to improve or expand the business
Problems With Cash Flow Forecast
- Problems occur with cash flows when the business’s outflows are greater than the opening balance plus the inflows, this results in a negative closing balance
- The business will not have enough cash to meet payments that are due
- Fluctuations in cash flow are known as the cash flow cycle
Solutions To Cash Flow Problems
- Overdraft arrangements
- Negotiating terms with creditors
- Reviewing and rescheduling capital expenditure
- Reduce unnecessary expenses
Overdraft Arrangements
- A business with a fluctuating cash flow cycle should be able to show the forecast to the bank and make arrangements for periods of negative cash flows
- Banks sometimes offer free overdraft facilities to help businesses through these periods, but only if pre-agreed
- Going overdrawn on a
bank account without an agreement with the bank can be a very expensive option
Negotiating Terms With Creditors
- Creditors are people or businesses that a
business owes money to, normally because goods or services have been bought on credit as opposed to cash purchases - A business with cash flow problems could
try to negotiate a longer payment term with its suppliers – e.g. an increase from 30 days to 60 days - This would slow down the flow of cash out of the business
- A negative effect of this, however, may be the loss of any discounts offered for prompt or early payment
Reviewing + Rescheduling Capital Expenditure
- Having identified cash flow problems, the owner or manager could review what cash outflows were being spent on
- Such a review might identify areas of expenditure that could be cut or postponed
- It is difficult to do this if the expenditure is on revenue items e.g. replacement stock – but more achievable if it is capital expenditure
- A business could postpone plans to replace machinery or buy a new van. An alternative could be to consider leasing an item of capital equipment
rather than buying it outright
