Introduction to Cash Flow Forecasting

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Nature of Cash Flow

In any business enterprise, the most tangible asset it has is cash although its value does change, especially in relation to other currencies. 

It's important to forecast the flow of cash into and out of the business. 

The cash flow is used to monitor the business activities. 

Cash in any business is used to meet daily expenses, bills and lots more besides. Failure to have a steady flow of cash could result in setbacks and unnecessary delays to the effective functioning of the business. 

The dire consequences of failure of steady stream cash flow can result in business failure.

The importance of cash flow forecasts are that they provide advance cash for a business, manipulating expenditure and income accounts to cover the likelihood of failures and shortfalls, forecasting provides insight into possible avenues which need to be tightened to prevent cash flow problems.

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Forecasting Cash Flow

There are two columns of any cash flow forecast, the first one lists the actual amount of the cash flow forecast, the second column lists the forecast amount. 

A standard forecast lists the following information:

Balance between receipts and payments with the negative figures shown in brackets, cash payments from the business, cash receipts to the business and closing and opening bank balances for the month.

A cash flow forecast shows the cycle of the business. 

Income and expenditure are ideally times to match each other. 

It's important to note that cash inflows generally lag behind outflows of cash from the business. 

Any imbalances can be identified through the use of cash flow forecast.

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How to Structure a Cash Flow Forecast

Cash flow forecasts are often set out with different columns for each month of the year. 

The cash flow forecast is also known as the cash budget. It shows three distinct sets of figures, payments, receipts and monthly cash flow for the month and the bank balance at the beginning of and end of each month.

The cash flow forecast shows the list of payments made out of the bank account. These include materials, miscellaneous expenses, wages and stock.

The receipts in the cash flow forecast, show the list of items which have been paid into the bank account of the business. These include loans, sales and grants. 

The cash flow of the business is the difference between the total monthly receipts and the total monthly payments. 

Cash flow forecasts can be calculated through the use of computer spreadsheets through the use of what if scenarios.

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How to enter Data on a Cash Flow projection

The cash flow statement and the cash flow forecast are similar in nature. The only difference between the two is that the statement shows the actual values and the forecasts show the predicted values. 

Data that can be found in a cash flow projection: Cash in hand, income, outgoings, total cash receipts, total cash available, total cash paid out, cash position.

Cash flow forecasts reflect any figures that are due to be received or paid out by the business. They're very useful in establishing estimates for the business. 

                                 Jan  Feb  March  April May  June  July

Cash Inflows                         10g    10g   10g   10g    10g   10g   10g

Cash Outflows                        2g      2g     2g     2g     2g    2g     2g

Wages                                   5g     5g     5g     5g     5g    5g     5g 

Stock                                    1g     1g      1g    1g     1g    1g      1g 

 Rent                                    Other Costs  900    900    900  900   900   900   900 Total Outflows 8,900  Net cash flow 1,100.  Opening Balance 0, Closing Balance 1,100. 1,100-2,200. 2,200-3,300. 3,300- 4,400. 4,400-5,500. 5,500-6,600. 6,600-7,700.

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Importance of Forecasting Cash Flow for Businesses

Every successful business needs to have a steady and consistent flow of cash. 

This ensures continues prosperity and adequate planning for the future of the business. 

Enable the business to anticipate any deficits or cash surpluses which prevents business deficits in advances. 

It prevents the chances of a business becoming liquidated. 

Availability of financial assistance from banks and other financial institutions. 

Management of surpluses in the businesses due to seasonal influxes. 

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