Cash-Flow Forecasting


    Cash-Flow Forecasting

    • A Forecast is a prediction of what may happen in the future
    • A cash Flow Forecast is therefore a prediction of the inflows and outflows of cash in the future
    • Businesses use past figures and experiences to predict forecasts
    • A Cash Flow statement differs from a forecast. It details what has happened in the business, i.e. the money that has flowed in and out of the business

    Cash flow versus Profit

    • Cash flow is most important in the short term as it is the businesses ability to pay their bills
    • Profit is more important in the long term
    • Businesses can be profitable and still experience cash flow problems

    Creating a cash flow forecast

    • Opening balance
    • Total incomes
      • Sale of goods
      • Rental income
    • Total expenditures
      • Materials
      • Energy costs
      • Wages
      • Transport

    Total incomes – total expenditures (outflows) = net cash flow

    Opening balance + net cash flow = Closing balance

    Closing balance is then carried forward as the opening balance for the next month

    Uses of cash flow forecasts

    • To anticipate potential shortages of cash
    • To examine and possibly adjust the timings of receipts and payments, in order to avoid problems
    • To arrange financial support where problems are forecast

    Causes of cash flow problems

    • Seasonal demand
    • Overtrading
    • Over-investment in fixed assets
    • Credit sales
    • Poor stock management
    • Unforeseen change

    Types of cash flow problems

    • Long term structural problems
    • Cyclical features
    • Internal problems / inefficiencies
    • External changes
    • Working capital problems

    Ways of improving cash flow

    • Improve planning
    • More thorough market research
    • Diversifying the product portfolio
    • Improved decision making
    • Contingency funds
    • Use of sources of finance to avoid short term working capital problems

    Problems with cash flow forecasts

    • Inaccurate market research
    • Changing tastes
    • Competitors
    • Economic changes
    • Uncertainty


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