1.3.4 Forecasting cash flows Here are some of the terms we will use in this presentation, can you work out what they are? PRICE SET money coming into the business MAN TYPES money going out of the business ASCOT REF making predictions into the future ABLE CAN what is left in the bank Receipts Payments Forecast Balance 1.3.4 Forecasting cash flows BUSS1.3.4 Forecasting cash flows

The nature of cash flow Cash flows into AND out of a business Cash sales Payments from debtors Owners’ capital invested Sale of assets Bank Loan Purchasing stock Paying wages Paying debts – bank loans, creditors Purchasing assets of assets Cash flow is interested in the balance between these cash inflows and cash outflows in terms if their relative size and timings. BUSS1.3.4 Forecasting cash flows

The nature of cash flow Cash flow is important to a business as it needs to ensure a positive cash balance in order to be able to meet day to day expenses A potentially profitable business may fail because it has cash flow problems BUSS1.3.4 Forecasting cash flows

Factors affecting the nature of cash flow Transaction types Sales and Purchases - Cash v. Credit Payment terms Timings of cash flows Seasonal Sales e.g. Strawberry farm Timings of payments in and out e.g. Package holiday company Nature of business Start-up capital and costs Time taken from input to output Stock holdings BUSS1.3.4 Forecasting cash flows

The nature of cash flow A cash flow forecast is a forward looking statement that tries to predict cash inflows and outflows in the future Cash flow forecasts are an important part of a business plan A cash flow statement is a backward looking statement that shows what happened to cash inflows and outflows Cash flow statements are normally presented as a part of a business’ accounts Cash flow problems can lead to business failure (Insolvency). A business that cannot pay its short term debts is in danger of becoming an ex-business! BUSS1.3.4 Forecasting cash flows

How to forecast cash flow – a prediction of the monthly inflows and outflows Cash inflows Owner’s investment or other source of finance Cash sales estimated from sales forecast May be over or under estimated To some extent depends upon the scale of research More difficult for new businesses Debtor payments estimated from sales forecast Determined by credit terms offered to customers BUSS1.3.4 Forecasting cash flows

How to forecast cash flow – a prediction of the monthly inflows and outflows Cash outflows Payment of fixed costs These should be easy to estimate on a monthly basis Payment of variable costs If sales are difficult to forecast logically so must the costs associated with meeting them Made more difficult if suppliers are free to change the prices Unforeseen expenses Or just forgotten expenses! A new entrepreneur may find it difficult to estimate how much they will be Payment terms What if a supplier changes terms and wants payment sooner or a lender demands their money back BUSS1.3.4 Forecasting cash flows

Filling in a cash flow forecast Jan Feb Mar Receipts (£) 10 000 15000 17500 Payments Raw materials 3500 4000 5500 Fixed Costs 5000 Other costs 4500 Total Payments 12500 13500 15500 Net cash flow (2500) 1500 2000 Opening Balance (500) 1000 Closing Balance 3000 Add the costs to get Total Payments Receipts minus Total Payments = NCF () denote a negative figure Cash inflows (Receipts) – cash outflows (Payments) = Net Cash Flow Net cash flow + opening balance (start of month) = closing balance (end of month) BUSS1.3.4 Forecasting cash flows

Filling in a cash flow forecast – your turn You may be asked to fill in the blanks on a cash flow forecast. See if you can do it here. Jan Feb Mar Receipts (£) 8000 6000 e Payments Raw materials 3000 c 4000 Fixed Costs 2500 Other costs 3500 Total Payments a 10000 Net cash flow b (2000) (500) Opening Balance 1000 (2500) Closing Balance d (3000) a = 3000+2500+4000=9500; b = 8000-9500 = (1500); c = 8000 – (2500 + 3000) = 2500; d = (2000) + (500) = (2500); e = 10000+(500) = 9500 BUSS1.3.4 Forecasting cash flows

Why businesses forecast cash flow To identify the timing and significance of any potential shortfalls To identify possible corrective action To help secure finance from potential investors or the bank To give confidence about short term survival To provide a guide against which to measure actual cash flow BUSS1.3.4 Forecasting cash flows

cash flow – stock levels and credit terms A business that is running low on stock will need cash or credit to reorder No stock means that sales will fall Firms with cash flow problems might be able to order on credit – buy now, pay later Suppliers will offer different credit terms to different customers depending on their credit worthiness Who would you give credit to in your class? How much money would you be willing to give? When would you want your money back? BUSS1.3.4 Forecasting cash flows

The purpose and contents of business plans What is a Business Plan? According to Business Link: ‘A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. It has many functions, from securing external funding to measuring success within your business.’ A Business Plan is a living, breathing document that will change and grow as your business grows. It will be used both internally, for your own use, and externally, by banks, external investors or those willing to provide grants. BUSS1.3.4 Forecasting cash flows

The role and importance of a business plan in minimising the risk involved A business plan is helpful in estimating the cash inflows and cash outflows that a firm faces A business plan will help in forecasting: Fixed costs e.g. rent, bank loans Variable costs e.g. stock It will provide a focus on the various costs, revenues and other cash inflows that a new business will have BUSS1.3.4 Forecasting cash flows

What are the contents of a Business Plan? The Executive Summary The most important part of the Business Plan. This provides a synopsis of the entire plan looking at the most important points. Often an external agent such as a bank will not go further than reading the executive summary. If the summary does not make the business sound worthwhile then the Bank Manager may not read on. Venture Capitalists and other external investors will often be put off a business start-up if it is not clearly explained and fails to capture their imagination. BUSS1.3.4 Forecasting cash flows

What are the contents of a Business Plan? Your business and the product that you are selling The Business - start-up date - legal structure - business sector e.g. retailing The Product - how is it differentiated? - why will it sell? - do you have a copyright, trademark or patent? - how will you develop your product? BUSS1.3.4 Forecasting cash flows

What are the contents of a Business Plan? The Market Market size and growth Competitors and how you can take market share off them or attract custom in a growing market Target market – is it a niche or mass? BUSS1.3.4 Forecasting cash flows

What are the contents of a Business Plan? Marketing Strategy and Sales The marketing mix - price, product, promotion, place Sales methods Skills of the entrepreneurs What skills and experience do you and your team possess. How will you motivate, train and recruit a workforce? BUSS1.3.4 Forecasting cash flows

What are the contents of a Business Plan? Operations Location Production facilities Management information systems Information Technology (IT) Financial Forecasts Cash flow forecast Forecast profit and loss Sales forecast BUSS1.3.4 Forecasting cash flows

The nature and importance of cash flow Watch the following clip about Rachel Lowe and her visit to the Dragon’s Den Was there potential for Rachel to avoid cash flow problems? What actions allowed her to successfully establish Destinations – the taxi cab game which the Dragon’s dismissed. BUSS1.3.4 Forecasting cash flows

MULTIPLE CHOICE □ A Bank loan □ B Overdraft Jan (£) Feb (£) Mar (£) Cash inflow (a) 8000 12000 Cash outflow 8500 9000 (c) Net Cash Flow (1500) (b) 2000 1. Use the table to calculate (a)-(c) 2. What is the most appropriate way to deal with the negative cash flow in January □ A Bank loan □ B Overdraft □ C Sell shares to friends and family □ D Increase sales revenue 1. (a) 7000 (b) (1000) (c) 10000 2. B BUSS1.3.4 Forecasting cash flows 20