Cash Flow Forecasts
These look at all the money coming into and leaving the business, usually over the next 12 months.
Why produce a cash flow forecast?
- If you want a loan from the bank, the bank will insist on a cash flow forecast to ensure the firm can pay the money back.
- It's a good way of anticipating any future money problems before they occur.
- It's a useful way of asking 'what-if' questions.
Limitations of a cash flow forecast:
- Actual figures are likely to be different.
- The longer the time period, the less accurate the forecast.
- Some figures the firm has no control over.
- Price could change.
- Demand could be affected by external factors.
- New competitors.
- Fashions and tastes changing.
- Fixed costs could change.
When a firm has predicted cash flow problems, what can it do?
- Try to increase sales through marketing.
- Increase price. More money will come in, but sales may drop.
- Change to cheaper suppliers. Although quality may suffer.
- Reduce other costs.
- Ask the bank for an overdraft facility.
- Extend your trade credit by asking your suppliers for longer to pay.
- Change your business strategy.