1. Cash Flow Forecasting

2. Cash Flow
Cash flow is the relationship between the money coming into a business and the money going out.
Sales revenue
Own capital
Loans
Rent
Materials
Wages
Utility Bills
Advertising

3. Cash versus Profit Good cash flow does not mean profit!
You may have enough money to pay the bills but if it is taken from loans or your own pocket it is not profit.
Equally you can make a profit over a year but have times when there is a cash flow crisis.

4. Cash Flow Forecast
A cash flow forecast is a prediction of future cash inflows and outflows.
Firms carry out cash flow forecasting to help them plan and manage their shot-term finances.

5. Uses of Cash Flow Forecasting
Helps a business to plan ahead for future finances.
Helps to identify potential problems and months when the business will have a cash shortfall. Firms can then make changes to improve cash flow
A cash flow forecast will be needed to obtain finance such as a bank loan

6. Managing Cash Flow A business needs to: Forecast cash flow
Identify any future cash flow problems such as a deficit
Analyse the cause
Take action to prevent a cash flow crisis

7. What are the causes of cash flow problems?
A fall in the number of customers (low sales)
Giving customers too long a credit period
Bad debts (customers not paying)
Paying out for supplies, salaries etc before receiving revenue from customers
Large payments for bills e.g. electricity bills paid quarterly
Purchasing large pieces of equipment without sufficient funds.
Seasonal demand

8. Exam Focus: What cash flow problems is WDP likely to face?
Paying out for staffing, supplies & overheads before receiving revenue from customers as it is likely to give customers a credit period.
Bad debts – a possibility in the current economic climate.
Purchasing pieces of equipment e.g replacing computers without having sufficient funds arranged

9. How can cash flow be improved?
Promote or attract new customers to get revenue
Obtain trade credit from suppliers
Reduce credit periods for customers or obtain deposits/part payments
Actively chase debts
Put off purchases of equipment or lease them
Spread payments of bills
Arrange an overdraft facility.

10. Practice Question
Tom is responsible for dealing with the financial management of WDP. One of the ways he does this is by managing the cash flow.
(a) Using examples of cash flow problems, explain how Tom could limit their impact.(8)