- 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 detailed 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
In order to create a cash flow forecast you will need to know the following
- 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
