AS Business Studies: Cashflow Forecasting

Hey, here are some revision notes mainly for people taking the AQA AS Business Studies Unit 1 but can be used for other exams too. I hope this helps you to revise! Please rate and comment on how to improve :D

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Cash Flow Forecasting

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Specification
Using Cash Flow Forecasting Candidates should understand
· the nature of cash flow the sources of information for
· how to forecast cash flow cash flow forecasts and
· the structure of a cash flow understand the significance of
forecast the forecasts.
· why businesses forecast cash Candidates should be able to
flow. amend or complete a cash flow
forecast.…read more

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Cashflow
Cash flow is a dynamic and unpredictable part of life for a start-up
Cash flow problems are the main reason why a new business fails
Cash flow forecasting looks at why and how a start-up should prepare regular
forecasts
Why cashflow is important
­ Cash is king ­ it is the lifeblood of a business
­ If a business runs out of cash it will almost certainly fail
­ Few start-ups have unlimited finance ­ cash is limited, so it needs to be
managed…read more

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Cashflow
Sources of Information for a Cashflow Forecast
1. Entrepreneur experience
­ Industry experience can prove vital
­ Otherwise, it forecast has to include "gut feel" assumptions (dangerous)
2. Market research
­ A crucial role ­ typical payment terms for customers, suppliers
­ Reflect seasonal peaks and troughs in demand
­ Helps identify potential costs
3. Suppliers
­ Very useful source of industry information
4.…read more

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Structure of a Cashflow
Important Definitions
Cash flow forecast = an estimate of a firm's future cash inflows and outflows
Net monthly cash flow = the estimated difference between monthly cash inflows
and outflows
NET MONTHLY CASH FLOW = TOTAL INFLOW ­ TOTAL OUTFLOW
Opening balance = cash held by the business at the start of the month. If a
business has just started, then the opening balance is going to be 0.…read more

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Cashflow Example
Forecast is normally
Net cash flow is the difference each produced by month
month between cash inflows and cash
outflows Jan Feb Mar Total
CASH INFLOWS
Investment 10,000 10,000
Sales 2,500 10,000 15,000 27,500
Total inflows 12,500 10,000 15,000 37,500
CASH OUTFLOWS
Raw materials 4,000 5,000 5,000 14,000
Wages & salaries 3,500 4,000 4,000 11,500
Marketing 2,500 1,000 2,000 5,500
Set-up costs 3,000 1,000 0 4,000
Other costs 2,000 1,000 1,000 4,000
Total outflows 15,000 12,000 12,000 39,000
NET CASH FLOW -2,500 -2,000…read more

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Limitations
Common Problems with Cashflows
1. Sales prove lower than expected
­ Easy to be over-optimistic about sales potential
­ Market research may have gaps
2. Customers do not pay up on time
­ A notorious problem for small businesses
3. The cost of production proves higher than expected
­ Perhaps because purchase prices turn out higher
­ Maybe also because the business is inefficient
4.…read more

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Exam Tips
You cannot underestimate the importance of cash flow forecasting for a start-up.
Think of the cash flow forecast as the "early warning system", which will show
when the danger periods are and how viable the business is
Don't forget that cash flow forecasts are not perfect - they have their limitations,
not the least because they are based on estimates and assumptions.…read more

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