Finance - Cash Flow

Question 1

What is a cash flow forecast?

Answer 1

A cash flow forecast is a financial statement that predicts the amount of cash coming in and the amount of cash coming out in a period of time.

Question 2

What are the purposes of a cash flow forecast to a business?

Answer 2

1. Forward planning - it predicts the level of income and expenditure the business will have in the following time period
2. Review performance - it enables the business to compare the forecasted income and expenditure with actual income
3. It shows when loans can be repaid - if lenders can see the cash flow forecast when the loan can be repaid they are more likely to lend the money
4. Targets - it helps set financial targets for both income and expenditure

Question 3

What is the importance of a cash flow to a business

Answer 3

1. A steady flow of cash means the business will never have a shortfall of money to pay back payments
2. A steady cash flow ensures that essential bills such as wages can be paid
3. A steady cash flow ensures that the business can pay suppliers, which keeps the business open

Question 4

What are the consequences of an incorrect forecasting?

Answer 4

1. Business survival - if the cash flow forecast is incorrect, the business would have to shut down
2. Cash shortage - if a business failed to forecast its income and expenditure correctly it would experience a shortage of working capital. This would mean that the business wouldn’t have sufficient cash to pay essential bills such as wages
3. Inventory levels - of sales revenues are underestimated, sales inventory may not have been purchased and you won’t have stock to pay customers

Question 5

What are the 2 elements of a cash flow forecast?

Answer 5

1. This is the total money from the business hopes to receive from sales revenue or other means over the period
2. Payments - these are the expected payments for all expenditure such as purchases, wages, rent, sales, advertising and telephone etc.