Cashflow forecasting

Question 1

What is it?

Answer 1

Projecting cash receipts and payments over a designated future period and calculating the bank balance at regular intervals

Question 2

Why do we need it?

Answer 2

To help the business to manage its Working Capital Ratio
To project when business is likely to be short of money to pay debts and expenses
To project when there is likely to be a surplus of cash which can be invested

Question 3

Payments

Answer 3

Regular payments - wages, postage, petrol
Periodic payments - rent, rates, car insurance
Large capital expenses - premises, cars, furniture

Question 4

Income

Answer 4

Will vary from month to month

Question 5

Cash Shortfall

Answer 5

If firm needs to meet a large payment in a particular month, it needs to know in advance if there may be a problem in meeting that payment
Cashflow forecast will give advance warning
Owner could: introduce more capital, obtain overdraft, mortgage/loan, postpone buying fixed asset, other step

Question 6

Basis of cashflow forecast

Answer 6

CASH AT START OF MONTH
plus CASH RECEIVED
less CASH PAID
equals CASH AT END OF MONTH

Based on estimates until more accurate figures are available, forecast can then be revised

Question 7

Form

Answer 7

JAN FEB MARCH
RECEIPTS
Bank balance b/f 9,490 6,390 5,290
Profit Costs 6,000 6,500 12,300
Total receipts 15,490 12,890 17,590

PAYMENTS
Wages 4,300 4,300 4,300
Gen Office 800 800 800
Phone 500
Rent 2,000 2,000
Rates 2,700
Insurance 2,000
Purch of car 18,000
Drawings 2,000 2,000 2,000
Total Payments 9,100 7,600 25,100?

BAL C/F 6,390 5,290 ????