Unit 3 Business Finance - Learning Aim E Cash Flow

Cash flow forecasts

A document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months.

Inflows

The money coming into the business from various sources

Types of Cash Inflows

cash sales, credit sales, loans, capital invested, sale of assets and bank interest received

Receipts

Another word for cash inflows

Outflows

The money going out of the business for various purposes

Types of Cash Outflows

Cash and credit purchases, rent, rates, salaries, wages, bank interest payable, utilities, VAT, purchase of assets

Net cash flow

Total Inflows - Total outflows

Opening balance

Amount of cash available in a business at the start of a set time period, for example a month. It is the same as the closing balance from the previous month.

Closing balance

Amount of cash available in a business at the end of a set time period, for example a month.

Closing Balance - Calculation

Opening Balance + net cash flow

Credit period

The length of time given to customers to pay for goods or services received

Liquidity

A firm's ability to meet short-term cash payments

Insolvent

When a firm is unable to meet short-term cash payments.

Problems with cash flow forecasts

Outflows greater than inflows, inconsistent cash flows

Solutions to cash flow problems

Overdrafts, Negotiating longer credit terms with suppliers, Reviewing and rescheduling capital expenditure

Advantages of using cash flow forecasts

Encourages planning, can be used as part of a business plan to help raise finance, identifies in advance times of negative closing balances allowing the business to plan for these.

Limitations of using cash flow forecasts

They are based on forecast and therefore might be inaccurate, it is difficult to plan for unexpected events

Payments

Another word for cash outflows

VAT

A tax charged on most goods and services. It is a cash outflow and businesses must be registered for this tax if their sales go over a threshold (£85,000)

Uses of Cash Flow

Planning, Monitoring, Control, Target Setting