1. Financial forecasting
Aaron Furniture Ltd
Financial forecasting 1

2. Activity 1 What is a cash-flow forecast? Why do businesses need them?
Discuss questions as a class or in small groups. 2

3. What the cash-flow forecast does
Shows estimated income
Shows estimated expenses
Shows estimated timings of income and payments
Shows estimated cash balances
Explain the items on the cash flow. 3

4. What the cash-flow doesn’t show
Profit
Actual figures
Cash flows look at timing of income and payments. Make sure learners know that any negative balances do not indicate profits and losses. Also ensure they know these are not actual figures and may be subject to change. 4

5. Why do businesses forecast cash flow?
Businesses need to plan
Part of that planning will involve spending money
They need to know what cash will be available and when
They need to know if they will have to source extra finance
Discuss reasons for cash-flow forecasting. 5

6. Activity 2 Discussion question
What might cause a business to suffer cash-flow problems? 6

7. Activity 2 feedback Lack of revenue resulting in short-term loss
Over-investment in production, creating spare capacity that is not required
Holding too much stock
Poor credit control
Overtrading – growing too fast
Seasonal demand 7

8. Dealing with cash-flow problems
Businesses can address cash flow by:
Cutting costs
Reducing stock held
Delaying payments to suppliers
Reducing credit period offered to customers
Delaying or cutting back plans to expand the business
Borrowing for temporary problems 8

9. Activity 3 Discussion questions: What is profit? What is a loss?
What is the difference between profit and cash flow? 9

10. What is profit? Profit is the surplus of revenue over costs
Profit = Total Revenue – Total Costs
Profit is the business owners’ reward for risk-taking
Profit can be used to:
reward owners
invest in the business
save for the future 10

11. What is a loss?
A loss is where the revenue from sales does not cover the costs of production.
Losses can be reduced or turned into profit by:
Reducing costs, e.g. getting rid of staff, looking for cheaper materials suppliers
Increasing revenue, e.g. cutting prices to sell more items, finding new markets 11

12. What is the difference between profit and cash flow?
Revenues eventually become cash into the business
Costs become cash paid out of the business
But: cash flow and profit are not the same 12

13. Differences
Timing – sales and purchases made on credit – buy now, pay later
Accounting for fixed assets – treated as capital assets not costs; depreciation is charged as a cost but is not cash
Financing of business:
Money from owners is treated as capital
Loan repayments are repayment of liabilities
Dividends and interest are costs associated with these 13