Liquidity is important. Having money to spend helps protect against unexpected expenses and keeps the business afloat.

Cash flow forecasting links with: budgeting, inventory management, financial objectives, working capital, sales forecasting.

Cash flow is important.

• Cash flow is a dynamic and unpredictable part of life for most businesses (particularly start-ups and SMBs).
• Cash flow problems are the main reason why a business fails.
• Regular and reliable cash flow forecasting can address many of the problems.

### Cash inflows

• Cash sales
• receipts from trade debtor’s
• sale of fixed assets
• interest on bank balances
• grants
• loans from bank
• share capital invested

### Cash outflows

• payments to suppliers
• wages and salaries
• payments for fixed assets
• tax on profits
• interest on loans and overdrafts
• dividends paid to shareholders
• repayment of loans

### Why produce a cashflow forecast?

Efficient businesses produce accurate cashflow forecasts.

• Advanced warning of cash shortages
• Make sure that the business can afford to pay suppliers and employees
• Spot problems with customer payments
• As an important part of financial control
• Provide reassurance to investors and lenders that the business is being managed properly

Terminology: Overdraft Facility ⇾ A service provided by a bank to allow a business to go into negative balances and later pay it off with interest.

Example cashflow forecast:

Interpreting the table

Closing balance for one month is the opening balance for the next.

• They key to effective cashflow forecasting is reliable information
• A good cashflow forecast is:
• Updated regularly
• Makes sensible assumptions
• Allows for unexpected changes

## Worksheet

1. Cash flow values

A = 3500 ✓ B = 8000 ✓ C = -(4000) ✓ D = 8000 ✓

1. Calculate net cash flow

Untrusted data below


35000 - 34000= £1500 NOV CLOSE
4000 NOV OPEN

(£500 + £36000) - 34000 = £3500 DEC CLOSE
1500 DEC OPEN

(31500+36000)-(34000+34000) = -£500 NET CASH FLOW


# Recap

## Liquidity

Liquidity is how close an asset is to cash.

• Cash is the most liquid asset
• A building is fairly illiquid, as the process to convert it into cash is lengthy

## Cash flow is important

• Cash flow is dynamic and unpredictable
• Cash flow is the main cause of business failure.
• They try and grow too quickly and run out of working capital, they might be profitable, but if they run out of cash they can’t pay the bills.

Non-exhaustive lists:

• Cash Inflows

• Cash sales
• Receipts from trade debtors
• Sales of fixed assets
• Interest on bank balances
• Grants
• Loans from banks
• Share capital investments
• Cash outflows

• Payments to suppliers
• Wages and salaries
• Payments for fixed assets
• Tax on profits
• Interest on loans & overdrafts
• Dividends paid to shareholders
• Repayment of loans
• Cash is king - it is the lifeblood of the business

• If a business runs out of cash it will almost definitely fail

• Few businesses have near unlimited cash, so careful management is required

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