financial plan:cash flow and budgets

cash flow forecast

the prediction of all expected reciepts and expenses of a business over a future time period which shows the expected cash balance at the end of each month

cash inflows

money going into the business

cash outflows

the flow of money out of the business

net cash flow

the difference between money flowing into a business and the cash flowing out of the business in a given time period

solvency

the degree to which a business is able to meet its debts when they fall due

cash flow forecasts

• poor cash flow leads to a failure of business

net cash flow equation

opening balance

the money the business has at the start of each month

aka the money left over from the last month

so last month’s closing balance is this months opening balance

closing balance equation

net cash flow + opening balance

brackets mean its negative

uses of a cash flow forecast

• identifying the timing of cash shortages

• sorting applications for finance

• enhancing the planning process

• monitering cash flow

limitation of cash flow

• data used in forecasts are esitmates if they are inaccurate it will be unreliable

• business activity has tonnes of factors called external forces that are beyond the control of owners and managers

• time is money and time constucting an inaccurate cash flow forecast is a wast of time that can be distributed elsewhere

• only focuses on cash cannot evaluate performance

budget

a quantitative economic plan prepred and agreed in advance

budgetry control

a business system that involves making future plans, comparing actual results with the planned results and then investigating the causes of any differences

historicle figures

quantitative information based on past trading records

opportunity cost

this is the benefit lost from the next best alternative to the one chosen

production cost budget

a firm’s planned production costs for a future time period

sales budget

a firms planned sales for a future period of time

variance

the difference between actual financial outcomes and the ones budgeted

variance analsis

calculating variances and identifying their auses

zero based budgeting

a system of budgeting when no money is allocated for costs or spending unless justified by the fund holder