Cash Flow Forecasting & Management
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
- 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
- Cash flow values
A = 3500 ✓ B = 8000 ✓ C = -(4000) ✓ D = 8000 ✓
- Calculate net cash flow
Untrusted data below
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.
- Cash sales
- Receipts from trade debtors
- Sales of fixed assets
- Interest on bank balances
- Loans from banks
- Share capital investments
- 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