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Cash Flow ForecastsUnit 5: Financial Planning

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Learning objectivesWhat is a cash flow forecast?How are cash flow forecasts constructed?How are cash flow forecasts used by businesses?How is ICT used in cash flow forecasts?

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Cash flow forecasts

A cash flow forecast is a prediction of the future flows of money in and out of the business for a specified period of time.

Cash flow is the money coming into a business (the income or inflows) and the money going out of the business (the expenditure or outflows)..

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Inflows and outflows

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Why do businesses forecast cash flow?

decide whether to expand or reduce existing activitiesdecide whether to produce new goods or services, invest in new resources or carry out new activities identify any potential deficits and allow the business to plan ahead for themidentify any potential surpluses so that the business can use this money to their benefit.

Cash flow forecasts can be used to:

Producing a cash flow forecast allows a business to plan how much money the business will have at any given time. This information can then be used to make decisions about business activities.

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Constructing a basic cash flow forecast

InflowsSales revenue 143,000 150,000 209,000 180,000 195,000 198,000Loans 20,000 0 0 0 0 0Grants 0 0 0 0 0 0Investors' capital 0 0 0 5,000 0 0Total inflows 163,000

OutflowsStock 30,000 28,000 28,500 31,200 29,000 29,800Wages 110,000 110,000 110,000 110,000 115,000 115,000Rent 4000 4000 4000 4000 4000 4000Utility bills 1000 1000 1000 1000 1000 1000Interest on loans 2000 2000 2000 2000 2000 2000Taxes 500 500 500 500 500 500Advertising 12,000 13,000 12,000 15,000 12,000 14,000Total outflows 159,500

Monthly summaryOpening bank balance 20,000Net cash flow 3,500Closing bank balance 23,500

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Complete a basic cash flow forecast

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Constructing a basic cash flow forecast

January February March April May JuneInflowsSales revenue 143,000 150,000 209,000 180,000 195,000 198,000Loans 20,000 0 0 0 0 0Grants 0 0 0 0 0 0Investors' capital 0 0 0 5,000 0 0Total inflows 163,000 150,000 209,000 185,000 195,000 198,000

OutflowsStock 30,000 28,000 28,500 31,200 29,000 29,800Wages 110,000 110,000 110,000 110,000 115,000 115,000Rent 4000 4000 4000 4000 4000 4000Utility bills 1000 1000 1000 1000 1000 1000Interest on loans 2000 2000 2000 2000 2000 2000Taxes 500 500 500 500 500 500Advertising 12,000 13,000 12,000 15,000 12,000 14,000Total outflows 159,500 158,500 158,000 163,700 163,500 166,300

Monthly summaryOpening bank balance 20,000 23,500 15,000 66,000 87,300 118,800Net cash flow 3,500 -8,500 51,000 21,300 31,500 31,700Closing bank balance 23,500 15,000 66,000 87,300 118,800 150,500

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Case study: Simon’s new car

Simon Harris wants to buy a new car to take to university in September. He has estimated that a good second hand car will cost him £2500. Simon’s dad has agreed to give him £1500 at the end of August as an early birthday present, to help him buy the car.

Simon is going to try and cut down on his spending. He estimates that he will spend £30 a month on clothes, magazines and music, and £25 a month socializing.

At the start of March, Simon had £450 in his bank account. He earns £150 a month working with his uncle.

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Case study: Simon’s new car

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Case study: Simon’s new car

The following information is what actually happened to Simon. Revisit the cash flow forecast on the next slide and decide whether Simon can still afford his car.

Simon spent £40 shopping in May and August.He worked a few extra hours in June and earned £175.He spent £80 going to a music festival in April.He only earned £100 in March.

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Case study: Simon’s new car

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How does cash flow work?

Ben Matthews is creating a cash flow forecast for his farm business, growing potatoes.

What cash flow problems might Ben face?

He plants the potatoes in March and harvests them in September. Ben then sells them to the wholesaler and receives payment. Between March and September he has to pay for fertilizers, diesel for the farm vehicles, etc.

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Consequences of running out of cash

Staff may not be paid on time which can lead to de-motivation and conflict.Creditors may not be paid on time, which may lead to stricter terms of credit in the future, or even no credit at all. In extreme cases creditors may take a business to court to reclaim what they are owed.Suppliers can offer discounts for prompt payments and the business may not be able to take advantage of these.

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Planning ahead

What other solutions for managing or avoiding a deficit can you think of?

Cash flow forecasts allow businesses to identify when they are likely to have a negative cash flow. This allows them to take actions to avoid or deal with the situation, e.g. by pre-arranging an overdraft.

Other methods of avoiding cash flow shortages:• Reduce expenses (outflows)• Increase income (inflows)• Retime capital expenditure

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Notes

• Cash Flow Forecasting – what are the limitations – page 497

• Causes of cash flow problems– Poor credit control p497– Allowing customers too long to pay p499– Expanding too rapidly p499– Unexpected events p500

• Activity 27.3 p498 and 499

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True or false?

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ICT and cash flow forecasts