Cash flow forecast

Question 1

Cash flow forecast

Answer 1

Is a document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months.

Question 2

Inflows/receipts

Answer 2

are the money coming into the business from various sources

Question 3

Types of inflows

Answer 3

• cash sales - customer pays at the time of purchase.
• credit sales - customers pay in a pre agreed period after the sale.
• loans - bank loans to fund purchases.
• capital introduced - money invested from entrepreneurs or shareholders when a business is first set up or looks to expand.
• sale of assets - sale of items owned by the business which are no longer needed in order to bring a short term cash injection.
• bank interest received - interest paid by the bank on credit balances.

Question 4

Outflows/payments

Answer 4

Cash outflows or payments are the money going out of the business for various purposes.

Question 5

Types of outflows

Answer 5

• cash purchases - item purchased by a business and paid for at the time of purchase.
• credit purchase - items purchased by a business and paid for at a later point.
• purchases of assets - non-current assets that a business is likely to keep for more than one year such as machinery and cars.
• Value Added Tax(VAT) - businesses that are VAT registered must pay VAT to HMRC and should be shown in cash flow forecast.
• bank interest paid
• rent
• rates
• salaries
• wages
• utilities

Question 6

Opening balance

Answer 6

how much money a business has at the start of the month

Question 7

Closing balance

Answer 7

how much money the business has at the end of each month

Question 8

net cash flow formula

Answer 8

inflows - outflows

Question 9

closing balance formula

Answer 9

opening balance + net cash flow

Question 10

What two influences does credit periods have on a businesses cash flow?

Answer 10

• business must consider how long it gives it customers to pay, the longer a credit period the slower will be the money coming in.
• affects the ability of the business to gain credit from suppliers. If a business secures suppliers on credit it will reduce cash flow out of business. The longer the credit period the later the cash flows out. So, if a business both sells and buys on credit from suppliers it needs the first to have a shorter credit period then the second.

Question 11

What is a key purpose of cash flow forecasts?

Answer 11

Is to highlight in advance any months where there is a risk of a negative cash flow as this allows the business to make arrangements e.g. a pre-arranged overdraft.

Question 12

What does it mean to have a negative closing balance?

Answer 12

A business is said to have liquidity problems and is at danger of becoming insolvent.

Question 13

Problems with cash flow forecasts

Answer 13

Problems occurs when outflows are greater then opening balance plus the inflows, as will result in a negative closing balance. This means the business will not have enough cash to meet repayments that are due.

Question 14

Solutions to cash flow problems - Overdraft

Answer 14

a business with fluctuating cash flow cycle should be able to show the forecast to the bank and make arrangements for periods of negative cash flow.

Question 15

Solutions to cash flow problems - Negotiating terms with creditors

Answer 15

a business could try to negotiate a longer payment term with its suppliers, this would slow down flow of cash out a business, however, there is a loss of any discounts offered for prompt or early payments.

Question 16

Solutions to cash flow problems - Reviewing and rescheduling capital expenditure

Answer 16

Review might identify areas of expenditure that could be cut or postponed, e.g. postpone plans to replace machinery or buy a new van.

Question 17

Advantages of cash flow forecasts

Answer 17

• encourages planning for cash inflows and outflows.
• enable cash flow to be monitored and corrective action taken if necessary.
• can be used as part of a business plan, to help raise finance.
• identifies in advance times of negative closing balance allowing the business to plan for these.

Question 18

Disadvantages of cash flow forecasts

Answer 18

• based on forecasts and so may be inaccurate
• cannot plan for unexpected events such as rise in cost of raw materials
• time taken to produce a cash flow forecast could have been spent on other tasks.