Cash flow forecasts

Question 1

Define a cash flow forecast

Answer 1

A prediction/estimate of the movement of cash into and out of a business over a period of time
-Net cash flow
-Opening balance
-Closing balance

Question 2

Why are cash flow forecasts useful

Answer 2

• identifies the timing of cash shortages and surpluses.
• enhances the planning process – guides the business towards taking appropriate action.
• helps identify where problems might occur and helps to avoid the business being forced out of business.
• supports attempts to raise finance.
• assists in determining the liability of the new business venture.

Question 3

Ways to improve cash flow position

Answer 3

• Improving revenue through increased sales and marketing campaign – unlikely to work if
  economic conditions are against them.
• Increase prices – will depend on price sensitivity (PED) – may cause a significant decrease in revenue.
• Reduce wage bill by making some people redundant – Trade Union would fight this and could result in a strike – staff may leave or become de-motivated.
• Reduce drawings – will they be able to meet their personal living expenses?
• Cut costs – this would depend on how efficient they already are, e.g. cutting raw material costs by finding a new supplier may compromise quality.
• Reduce the use of outside contractors, e.g. cleaners. Could they and the staff do this instead? Do they have the time? Would the
  service they offer to their customers suffer? Can they get out of the contract?
• Chasing-up bad debtors – may generate cash – but may lead to cash problems for customers who may not be able to pay any debts.
• Increasing promotions – may lead to increased sales but may also have no impact on sales – will
  be expensive to set up.
• Cut the advertising budget – could this have a negative impact on the number of sales?
• Find new insurer – will cover still be as good?
• Invite new shareholders to inject money into the business – possible dilution of control.
• Sale of assets - may lose benefits of the assets.
• Re-negotiate terms of the loan - may back more in the future.
• Debt factoring on future invoices but will not get full invoice value.
• Ask bank to increase overdraft limit on a short-term basis but extra interest.
• Extend credit terms with their own suppliers might cost more as early discount lost

Question 4

Directors interest in business accounts

Answer 4

security of position – to measure whether past planning has been success and to aid decision
making for future.

Question 5

Workers interest in business accounts

Answer 5

to see whether the business is successful, which will impact on job security – also if business
could afford wage increase.

Question 6

Managers interest in business accounts

Answer 6

to see whether the business is successful, which will impact on job security – also could business
afford salary increase – do they qualify for bonus? – has their management been effective?

Question 7

Shareholders / investors interest in business accounts

Answer 7

– investors – to see whether
the business is successful, which may effect value of shares – influencing shareholder wealth and level of dividend, which adds to shareholder income – decisions on keeping, buying or selling.

Question 8

Customers interest in business accounts

Answer 8

may want to know about survival of business, which will decide whether it is worthwhile being a customer – or should contracts be negotiated elsewhere? – also might high profits suggest business
charging high prices.

Question 9

Suppliers interest in business accounts

Answer 9

also may want to know about survival of business – to find whether the business is likely to be
able to pay its trade credit.

Question 10

Banks interest in business accounts

Answer 10

may also want to know about survival of business – to find whether the business is likely to be
able to pay its loans/overdraft.

Question 11

Governments interest in business accounts

Answer 11

as customers – to find how much tax will be collected from the business – does it consider
profit to be excessive? – should more tax be levied?

Question 12

Competitors interest in business accounts

Answer 12

to make comparisons – to aid planning/ competitive strategies.

Question 13

Causes of cash flow problems

Answer 13

-Low Sales
-Slow Payments from Customers
-High Expenses
-Poor Inventory Management
-Inadequate Financial Planning
-Poor Credit Control and Collection Processes
-Excessive Spending or Over-Investment
-Rapid Growth
-Seasonality
-Unexpected Changes
-Bookkeeping Mistakes
-Unrealistic Goals
-Overtrading
-Poor Management of Accounts Payable and Receivable
-Lack of Cash Reserves
-Inadequate Credit Terms
-External Factors
-Ineffective Forecasting:

Question 14

Benefits of cash flow forecast

Answer 14

• predicting future cash positions
• identifying potential problems
• supporting strategic planning and growth
• facilitating debt management
• improving financial stability
• attracting financing opportunities

Question 15

Limitations of cash flow forecast

Answer 15

• inaccuracy due to external factors
• reliance on estimated data
• time-consuming to create and maintain
• not a substitute for accounting
• focus on short-term (long-term will be less accurate)