CASH FLOW FORECASTING

What is cash flow?

Cash flow is the movement of money into (inflows) and out of (outflows) a business over a period of time.

Why is cash flow important?

Positive cash flow ensures a business can pay suppliers, employees, and other expenses. Negative cash flow can lead to insolvency.

What is a cash flow forecast?

A cash flow forecast is a prediction of a business’s expected inflows and outflows of cash over a future period, usually monthly.

What is the purpose of a cash flow forecast?

To help a business plan for cash shortages, make informed financial decisions, and ensure it can meet its obligations.

What are the main components of a cash flow forecast?

Opening balance, cash inflows (e.g., sales, loans), cash outflows (e.g., rent, wages), net cash flow, and closing balance.

How do you calculate net cash flow?

Net\ cash\ flow = Total\ cash\ inflows - Total\ cash\ outflows

How do you calculate the closing balance?

Closing\ balance = Opening\ balance + Net\ cash\ flow

How do you interpret a cash flow forecast?

By identifying periods of potential cash shortages or surpluses, allowing proactive management.

How can a cash flow forecast impact a business?

It helps prevent insolvency, plan for investments, manage debts, and improve financial control.

How can cash flow forecasts affect stakeholders?

1. Employees
   • Ensures salaries can be paid.
2. Suppliers
   • Maintains good credit relationships.
3. Owners
   • Informs decisions on investment and expansion.
4. Lenders
   • Shows repayment ability.

What are common causes of cash flow problems?

1. Late payment from customers
2. High expenses or overheads
3. Poor budgeting or planning
4. Low sales or seasonal demand
5. Over-investment in stock or fixed assets
6. Unexpected costs

Why can high stock levels cause cash flow problems?

Money is tied up in stock that is not immediately generating cash.

Name strategies a business can use to improve cash flow.

1. Offering discounts for early payment
2. Chasing overdue payments
3. Negotiating extended payment terms with suppliers
4. Reducing stock levels
5. Controlling expenses
6. Taking out short-term finance (e.g., overdraft, loan)

How does reducing stock improve cash flow?

Frees up cash that would otherwise be tied in unsold inventory.

How does offering early payment discounts improve cash flow?

Encourages customers to pay sooner, increasing cash inflows.

How does negotiating supplier credit improve cash flow?

Delays cash outflows, helping the business retain cash for longer.

What are the benefits of using short-term finance to improve cash flow?

Immediate cash is available, preventing short-term insolvency.

What are the limitations of using short-term finance?

Interest costs and potential long-term debt problems.

What are the benefits of reducing costs or stock levels?

Frees cash and improves efficiency.

What are the limitations of reducing costs or stock?

May harm quality, customer satisfaction, or the ability to meet demand.

What are the benefits of cash flow forecasts?

1. Identifies potential cash shortages
2. Supports planning and decision-making
3. Helps secure finance from lenders
4. Improves financial control

What are the limitations of cash flow forecasts?

1. Based on estimates, so may be inaccurate
2. Cannot prevent unexpected costs or delays in payment
3. Requires regular updating to remain useful

Why might a cash flow forecast be inaccurate?

Sales may differ from expectations, customers may pay late, and expenses may change unexpectedly.