Cash Flow Forecasting

Cash Flow Forecasting

1. Cash Flow = The movement of cash into and out of a business over a period of time

   • The timing of and relationship between cash inflows and cash outflows can be crucial to the survival of a business

2. Cash inflows = are the receipt of cash into a business

   • Examples include : Sales of goods, payment by debtor, loans received

3. Cash outflows = are the transfer of cash from a business

   • Examples include : buying materials, paying expenses, repaying loans, buying capital equipment

4. Net monthly cash flow = the balance of a month's total cash inflow in relation to the month's total cash outflows

   • Cash inflows
   • Cash outflows

5. Cash flow problems = A business with a negative net monthly cash flow struggle to meet day to day expenditure

6. Cash flow forecast = the process of estimating the size and timing of cash inflows and outflows

7. Cash inflows = cash in from sales

   • Cash sales estimated from sales forecast
     • Difficult for new businesses, may be over or under estimated
     • To a certain extent, it depends upon the scale and accuracy of research
   • Debtor payments estimated from sales forecast
     • Determined by credit terms offered to customers and their reliability

8. Cash outflows = cash out for purchases and payments

   • Payment of fixed costs
     • These should be easy to estimate on a month to month basis
   • Payment of variable costs
     • If sales are difficult to forecast accurately then costs are as well
     • Suppliers may change prices or payment terms

9. Net cash flow = The net result of cash inflows and cash outflows each month

   • Calculated as...CASH INFLOWS - CASH OUTFLOWS

10. Opening balance = How much the business has at the start of each month

    • The closing balance for one month becomes the opening balance for the next

11. Closing balance = How much the business has at the end of each month

    • Calculated as...OPENING BALANCE + NET CASH FLOW