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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…

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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…

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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…

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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…

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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…

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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
­…

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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…

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