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Learning objectives
· What is a cash flow forecast?
· How are cash flow forecasts constructed?
· How are cash flow forecasts used by businesses?
· How is ICT used in cash flow forecasts?
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Cash flow forecasts
Cash flow is the money coming into a
business (the income or inflows) and
the money going out of the business
(the expenditure or outflows). For a
business to profit, more money needs
to be flowing in than out.
A cash flow forecast is a prediction of the future flows of
money in and out of the business for a specified period of
time. A cash flow forecast shows, month by month, the
money that it is anticipated will be coming into the business
and the money that the business will be paying out. The
working capital is the money available after the business
has paid out all the money owing.
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Inflows and outflows
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Why do businesses forecast cash flow?
Producing a cash flow forecast allows a business to plan how
much money the business will have at any given time. This
information can then be used to make decisions about
business activities.
Cash flow forecasts can be used to:
· decide whether to expand or reduce existing activities
· decide whether to produce new goods or services, invest
in new resources or carry out new activities
· identify any potential deficits and allow the business to
plan ahead for them
· identify any potential surpluses so that the business can
use this money to their benefit.
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How to construct a basic cash flow forecast
A spreadsheet program is normally used for completing
simple cash-flow forecasts.
Here, the headings of the six columns are the first six months
of the year. Cash flow forecasts are normally done on a
monthly basis for either six or twelve months ahead.
The first column shows the amount of money the business
expects to receive during January.
A total is calculated at the bottom of this column.
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