CASHFLOW FORECAST Learning Objectives l l l Learners

CASH-FLOW FORECAST

Learning Objectives l l l Learners will be able to define key terms relating to cash-flow forecasting Learners will be able to analyse the implications of long term negative net cash flow Learners will be able to create a cash flow forecast

What is cash? Cash is a liquid asset This means that it is immediately available for spending

What is cash flow? l CASH FLOW – the movement of money into and out of a business bank account INFLOWS refers to money received by the business during a period of time OUTFLOWS refers to money paid out by the business during a period of time EXAMPLES: • Sales revenue • Purchases • Capital • Rent & Rates • Loans • Wages & Salaries • Grants BUSINESS

Have a go…. Purchase of new computer for cash Sale of goods to customers – no credit given Interest paid on bank loan Wages paid to employees Debtors pay their bills Additional shares sold to shareholders Suppliers are paid Bank over draft is paid off

Continued… The difference between the inflows and the outflows is called the net cash flow. Positive net cash flow – Inflows are greater than out flows Negative net cash flow – Inflows are not enough to cover out flows Cash Balance – the amount of money in a business’ account at any particular time

Continued… What will happen if a business’ net cash flow remains negative for some time? For this reason, businesses must use cash-flow forecasting to predict the cash balance at regular intervals so that action can be taken if a problem is foreseen.

Building a cash-flow forecast To build a cash-flow forecast you need to have the following information Opening Balance - the amount of money in the business’ bank account at the start of the period Income per Period – the amount of money expected to go into the bank account in that month Expenditure per Period – the amount of money expected to leave the bank account in that month Closing Balance – the amount expected to be in the bank account at the end of the period

Worked Example l Complete “Totes Amy’s”

On your own l l Activity 22. 3 Activity 22. 4

Possible solutions to cash flow problems Owner invests more cash into the business Take out a bank overdraft Delay paying supplies by extending credit terms Possible long term solutions? Asking debtors to pay more quickly Cash sales only – no credit Take out a bank loan Short term Reduce expenses Delay or cancel purchase of capital equipment Limitations

Plenary Select the correct answer to each question and write the corresponding letter in your book Which of the following would not be a way of improving cash flow? a) b) c) d) Increasing the overdraft limit Chasing up debtors Upgrading equipment Destocking

Continued How is the “net cash flow figure” calculated? a) b) c) d) Opening balance + Cash inflows Cash outflows – Cash inflows Opening balance – Cash outflow Cash inflows – Cash outflows

Continued What is the net cash flow if the cash inflows for the month are £ 620 and the cash outflows are £ 1150? a) b) c) d) -£ 1770 -£ 530 £ 1770

Continued What was the opening balance for May if the closing balance for the month was £ 9720 and the net cash flow in May was -£ 3645 a) £ 6075 b) £ 13365 c) £ 7290 d) -£ 6075

Continued Which of the following is not a problem associated with cash-flow forcasting? a) b) c) d) All figures are estimates Forecast does not allow for unexpected costs It is not used again once it has been created Costs can rise throughout the year

Answers Q 1 – c) Upgrading equipment would increase cash outflows so cash flow would worsen Q 2 – d) Q 3 – b) Net cash flow = inflows – outflows = £ 620 - £ 1, 150 = -£ 530 Q 4 – b) Opening balance = closing balance – net cash flow = £ 9, 720 – (-£ 3, 645) = £ 13, 365 Q 5 – c)The cash flow forecast is used throughout the year to compare to the actual cash flow of the business

Cash flow is not the same as proft! Good Hope Enterprises Ltd records the following transactions over the month of June: Goods sold to customers $40, 000 (50% cash, 50% credit) Cost of goods sold $15, 000 (paid in cash) What was the gross profit in June? Assuming the business started the month with no cash, how much cash did it have at he end of June?

Remember A profitable business can run out of cash – insolvency This happens because: l allowing customers to long a credit period l purchasing too many fixed assets at once l expanding too quickly and cash is used to pay for higher inventory levels - overtrading l