- CASH FLOW FORECAST- the expected inflows and outflows of cash from a business over a given period of time
- CASH FLOW STATEMENT- the actual record of cash inflows and outflows from a business over a given period of time
- LIQUIDITY- a measurement of the ability of a business to transform assets into cash
- CASH FLOW SURPLUS- a situation in which a business has more cash flowing into than flowing out
- CASH FLOW DEFICIT- a situation in which a business has more cash flowing out than flowing in
- CASH INFLOW- receipts of cash flowing into business e.g. from sales, payments made by debtors and asset sales
- CASH OUTFLOW- payments of cash out of a business e.g. wages and salaries, rent charges, purchases of stock etc.
- CASH FLOW CYCLE- the regular patter of inflows and outflows of cash within a business
- NET CASH FLOW- balance remaining after deducting cash outflows from cash inflows
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Key Considerations of Cash flow
- does the business hold sufficient cash flow at the start of the cycle to allow them to cope with the delays in the cash flow cycle and to buy the assets and materials they need?
- how long does it take for the business to convert their inputs into cash?
- Some customers will not buy items with cash and will instead expect credit which further delays the inflow of cash.
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Structuring cash flow forecasts
It requires accurate and relevant data for the construction of the cash flow forecast. Sources of this information include the following:
- Previous cash flow forecasts
- Cash flow statements
- Banks- local experience and expertise
- Consumer research
- A study of similar businesses
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The problems of cash flow forecasting
Problems of cash flow forecasting:
- Changes in the economy- Changing spending patterns might affect demand for your goods and services
- Changing tastes and fashions- businesses in technology and fashion marketers need to be especially aware of changes to consumer buying behaviour and react fast
- Inaccurate market research- given the likely inexperience of the new business owner, they might not ask the right questions or the right people!
- The actions of Competitors- competitors will not stand back and allow you to take some of their market share
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why businesses forecast cash flow
- Identify Cash Shortfalls- is there sufficient cash available to enable the business to operate on a day-to-day basis and to meet their financial commitments?
- Identify Appropriate Solutions- does the business need an overdraft? how can they reduce costs or increase revenues?
- Part of The Business Plan- financial investors will want to see a 12 month forecast of your cash flow. Banks can identify when you might need help and when you can afford to repay them!
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