Forecasting Cash Flows

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Presentation transcript:

Forecasting Cash Flows Year 10 Business Studies Mr Flain

Lesson Objectives Understand the importance of cash flow when running a business Understand the difference between a cash flow forecast and a cash flow statement. Be able to estimate cash flows Understand that a business needs to plan to avoid cash flow problems arising.

What is cash in business terms? Key Term: Cash in a business is the notes and coins they have and also the money a business has in the bank. Key Term: Cash flow is the movement of cash in and out of the business.

Task Make a list of all of the money that would come into the business of Mr LePlonk and Shelly Isfit in the first 6 months of trading. This money is known as inflow Make a list of all of the money that would go out of the business of Mr LePlonk and Shelly Isfit in the first 6 months of trading. This money is known as outflow Set out your work in the table on the next slide.

How to set out your work Jan-July 2010 (£) Inflow/ Receipts Leave these blank at the moment Outflow/ Payments

You should have included the following - inflow From Sales Cash from sales Cash from credit sales (comes in after a time lag) From investors Cash from investors putting capital into the business to buy a share in the business. From lenders Cash from a bank loan From disposal of assets E.g cash from disposal of assets e.g. selling cars.

You should have included the following - outflow Purchasing stock Paying creditors – these are people you owe money to e.g. banks or other businesses Paying wages Paying rent Paying insurance Paying for advertising Paying tax Paying interest on debts Purchasing items on credit (when you pay for them at a later date)

What is Net cash flow Key Term: Net cash flow is the amount of cash left over once the outflow/ payments have been subtracted from the inflow/ receipts. Net cash flow = Inflow – Outflow Or Net cash flow = Reciepts - Payments

Task……. Now calculate the net cash flow of each of the two businesses. Add this onto the end of the tables.

The importance of cash If a business does not have cash then the following problems could occur. Copy this into your books Business has a lack of cash Business is unable to pay bills/staff Suppliers stop delivering as they have not been paid. Business may be taken to court because they can’t pay creditors (people they owe money to) Business becomes insolvent (can no longer pay its debts)

What is a cash flow forecast? A business needs to plan to ensure it has enough cash to survive. To plan for this a business will create a cash flow forecast. Key Term: A cash flow forecast is a prediction of how cash will flow in and out of a business over a period of time.

Why would a business use a cash flow forecast A business will use a cash flow forecast to See if the business expects to have a suitable amount of cash to survive See if the business needs to take any actions to avoid a shortage of cash in the business See how well the business should be performing after a period of time. Show to the bank to discuss if a loan is needed and how a loan would be repaid.

Building up a cash flow forecast…. Build up the forecast in your books We will do a cash flow forecast for 6 months from January to June. Draw the following table to store all of the inflow and outflow that we have seen so far. (£) Jan Feb Mar Apr May June Receipts Payments Net Cash flow

Building up a cash flow forecast…. Build up the forecast in your books Key Term: Opening balance is the amount of cash in the business at the start of each month (£) Jan Feb Mar Apr May June Receipts Payments Net Cash flow Opening Balance

Building up a cash flow forecast…. Build up the forecast in your books Key Term: Closing balance is the amount of cash in the business at the end of each month. The closing balance is calculated by adding the net cash flow onto the opening balance Closing balance = opening balance + net cash flow (£) Jan Feb Mar Apr May June Receipts Payments Net Cash flow Opening Balance Closing Balance NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Task Complete the cash flow forecast for Monsieur LePlonk (£) Jan Feb Mar Apr May June Receipts 1,500 1,200 900 2,000 2,100 2,400 Payments 1,400 800 1,700 1,750 1,800 Net Cash flow Opening Balance Closing Balance NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Task Complete the cash flow forecast for Shelly Isfit (£) Jan Feb Mar Apr May June Receipts 800 1000 700 500 400 Payments 600 Net Cash flow Opening Balance Closing Balance NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Questions Look at the cash flow forecasts for Monseir LePlonk and Shelly Isfit. What would be the consequences to Shelly’s business if her cash flow forecast is correct? What actions could she take to avoid any cash problems? What could be a reason for Monsieur LePlonk’s cash flow improving over the months?