Cash Flow Forecasts

What you will learn In today’s lesson you learn about: What is meant by a cash flow forecast The different items in a cash flow forecast How to construct a cash flow forecast Why cash flow forecasts are produced How a business overcomes cash flow problems

What is a cash flow forecast? A cash flow forecast is a table which shows the estimated amount of money likely to come into and out of a business each month A typical cash flow forecast normally estimates figures for one year i.e. 12 months

Cash Inflows and outflows Cash flow forecasts preparation requires that: Cash receipts are identified Cash payments are identified These are inflows of cash These are outflows of cash It will be necessary to determine when the flow occurs how much the cash flow is for

cash inflows/receipts Cash inflows or receipts are all those items which bring money into the business and include: Sales revenue – value of goods sold by the business Loans – business loans from bank or building society Grants – money given by government sometimes in the form of rent or tax reductions Capital - money from owners or shareholders

Cash Outflows or Payments Cash outflows or payments are all those items which take money out of the business and include the following costs: Stock – goods held for sale Rent – payment for premises Wages – payment to workers Loan repayments – instalments on loan Materials, rent and rates, heat and light etc

Cash Flow Layout There are a number of different ways to layout cash flow forecasts We will follow the layout used in the exam papers set by the WJEC exam board Often cash flows are set up using spreadsheets such as Excel for convenience of automatic calculation The following cash flow is for a new business in its first two months of trading

Cash flow Layout “VJH Books”(£) May June Opening Balance (A) 6700 Cash inflow/receipts Savings 10 000 Bank loan 25 000 Revenue 5000 7000 Total cash inflow/receipts (B) 40 000 Cash outflow/payments Purchase of stock 30 000 Wages 3000 4000 Interest on loan 300 Rent telephone New machinery Total cash outflow/payments (C) 33 300 14 300 Closing balance (A+B-C) (600)

Opening Balance Opening balance – money in bank at the start of each month From the cash flow you will notice that for May the amount is zero, because the bookshop is a new business Note also that in June the opening balance is the previous month’s closing balance i.e. £6700

Closing Balance closing balances – calculated by adding the opening balance and the total cash inflow/receipts and subtracting the total cash outflow/payments i.e. A + B – C For VJH Books in May the closing balance is: 0 (opening balance) + £40 000 (cash inflow/receipts) – £33 300 (cash outflow/payments) Answer = £6700 This becomes the next month’s opening balance NB here you are working out your net cash flow (B-C) and then adding your opening balance to find your closing balance

Cathedral Bookshop Exercise Look carefully at the cash flow forecast for the Cathedral Bookshop Read the case study and then answer questions 1, 2 & 3 Use the table provided to answer Q3 Work in pairs

Purpose of cash cash flow forecasts There are a number of reasons why it is important to draw up cash flow forecasts. Cash flow forecasts are essential as otherwise: creditors might not be paid wages might not be paid early settlement discounts might be missed cash surpluses might not be fully utilised

Purpose of cash flow forecasts There are a number of reasons why it is important to draw up cash flow forecasts. This could result in: Creditors refusing to supply additional purchases Creditors offering less favourable terms Cash flow forecasts are essential as otherwise: creditors might not be paid wages might not be paid early settlement discounts might be missed cash surpluses might not be fully utilised

Purpose of cash flow forecasts There are a number of reasons why it is important to draw up cash flow forecasts. This could result in: Key staff not working and output decreasing The permanent loss of staff, including key staff Cash flow forecasts are essential as otherwise: creditors might not be paid wages might not be paid early settlement discounts might be missed cash surpluses might not be fully utilised

Purpose of cash flow forecasts There are a number of reasons why it is important to draw up cash flow forecasts. This could result in: Purchases being more expensive Staff becoming de-motivated as they do not feel that their efforts to support the firm are being supported by the finance department Cash flow forecasts are essential as otherwise: creditors might not be paid wages might not be paid early settlement discounts might be missed cash surpluses might not be fully utilised

Purpose of cash flow forecasts There are a number of reasons why it is important to draw up cash flow forecasts. This could result in: Investment opportunities being missed Cash flow forecasts are essential as otherwise: creditors might not be paid wages might not be paid early settlement discounts might be missed cash surpluses might not be fully utilised

How does a business overcome cash flow problems? Try to arrange an overdraft Try to reduce its costs (e.g. lease or rent) or stage its payments over a period of time Try to delay payment to suppliers Try to increase cash coming into the business through increased sales or by some other means e.g. grants

Specimen paper Question 1 Unit 4 Question 1 – all parts except part (a) on costs (completed today as start-up exercise) Rest of question is on cash flow

Homework – Past paper question June 2006 June 2006 – question 3 Deadline: Monday lesson 5

What you have learnt You should now be able to explain What is meant by a cash flow forecast What are the different items in a cash flow forecast How to construct a cash flow forecast Why cash flow forecasts are produced How a business can overcome cash flow problems