1. Forecasting Cash Flows
Year 10 Business Studies
Mr Flain

2. 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.

3. 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.

4. 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.

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

6. 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.

7. 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)

8. 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

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

10. 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)

11. 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.

12. 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.

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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?