Cash Flow Forecast

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  • What is a cash flow forecast?
    • The prediction of future cash inflows and outflows showing the estimated cash balance at the end of each month.
    • Cash Flow Forecast
      • What is a cash flow statement?
        • The statement is based on actual cash flow data.
      • Inflows
        • Sales revenue
        • Payments by debtors
          • A debtor is someone who owes money.
        • Loans
        • Sales of  assets
        • Sales of shares
      • Benefits
        • Allows a business to see when they might need a loan or any other type of finance.
        • Able to plan for unexpected bills/payments they may have in the future.
        • If positive, the business can use a cash flow forecast to obtain a bank loan.
      • Outflows
        • Purchase of stock
        • Loan payments
        • Payment to creditors
          • Creditors are people who lend money.
        • Utility bills
        • Rent and rates
      • Drawbacks
        • Only a rough estimate, not very accurate.
        • Only accounts for a small proportion of the year.
        • May not take into account payments that will affect the business in the future.
      • Purpose
        • Whether there is enough cash available to pay salaries and settle debts on time.
        • Calculates the businesses reserves which could be invested in expansion or new equiptment.
        • Identifies when shortfalls are likely to happen and surplus funds are likely to become available.
      • Formula
        • cash flow = inflow - outlfow
      • What goes wrong?
        • Plenty of orders but not enough cash to buy the supplies needed to provide them.
        • The cost of meeting interest payments on money borrowed can exceed available cash.
        • Sales fall unexpectedly so businesses cant pay the bills.
        • Debtors don't pay their bills leaving a company with no cash.
        • An unexpected crisis cases a decline in business.
      • Solutions to problems
        • Sell assets
        • Cut costs
        • Arrange an overdraft or a loan
        • Extend credit with suppliers
        • Reduce credit period to debtors
        • Factoring - sell debts

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