Cash Flow Forecasting & Management

Last updated Feb 7, 2023 Edit Source

• Business

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

• 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

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

1. Cash flow values

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

2. Calculate net cash flow

Untrusted data below

1
2
3
4
5
6
7
8

 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

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 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

Business