1. Cash Flow Forecasts

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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) + £ (cash inflow/receipts) – £ (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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

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

20. 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