Cash Flow Forecasts Flashcards
(14 cards)
What is cash
Money for “day to day” expenses. The “blood” money of the business
What is cash flow
The flow of money in and out of a business
What is a cash flow forecast
A prediction of cash movements in and out of a business over a certain period of time, usually a year.
What is net cash flow
Difference between cash inflows and outflows. It can either be positive or negative
3 types of inflows / receipts
Cash and credit sales
Capital contributed by owner
Loans
Grants
Examples of payments / outflows
Wages
Electricity, water and telephone bills etc etc
Purchase of non-current assets
3 purposes of a cash flow forecast
PLAN- predict income and payments for the next year,
DEFICITS- identify place where the business will be in deficit so will ask for additional finance from external or internal sources
TARGETS - helps set financial targets for both income and expenditure
Why is cash flow important
- must be sufficient cash to pay cash payments
- if cash inflows are too low to pay suppliers in full, then suppliers can withhold supplies. Leads to shortages of goods and may force business to close down
- staff will look for other work if wages not payed on time
- if cash inflows exceed cash outflows then business can take advantage of cash purchases, thereby increasing profits
If cash shortage occurs due to incorrect forecasting what will happen
Cash shortage may occur if there is an incorrect forecast, this means business can’t pay day to day expenses. Leading to build up of expenses and can cause bankruptcy
A business may have to sell assets if incorrect forecasting occurs, why?
If business doesn’t have enough cash to pay day to day expenses it will be forced to sell its assets in order to stay “alive”
If incorrect forecasting occurs what might happen to purchase timings
If forecast indicates a cash surplus the business may purchase additional inventory. This may be a mistake as they won’t be able to use it for other purposes which might be more necessary.
If incorrect cash flow forecasting happens why might bank over draft be required
If forecast has over stated sales then cash balance will be incorrect, possibly requiring a bank overdraft to cover the costs in the short term.
If incorrect forecasting occurs what might happen to trading opportunities
If there is lower than predicted cash then business won’t be able to buy additional stock as a way of increasing market share or revenue
If incorrect forecasting occurs why might it make it harder for a business to survive
If in a cash deficit may be difficult for a business to continue trading meaning it will go bankrupt and therefore close down
