Cashflow Forecasts

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The principles of cashflow forecasting

Cashflow forecasting enables you to predict peaks and troughs in your cash balance.

It helps you to plan borrowing and tells you how much surplus cash you’re likely to have at a given time.

Many banks require forecasts before considering a loan.

The forecast is usually done for a year or quarter in advance and divided into weeks or months.

In extremely difficult cashflow situations a daily cashflow forecast might be helpful.

It is best to pick periods during which most of your fixed costs - such as salaries - go out.

It is important to base initial sales forecasts on realistic estimates

Short term cash flow forecasts

Cash Forecast for the Three Months Ended 31 March 20X1

This is the proforma that could be produced for a big, cashflow forecast question, though there has not been one yet, it is a minor topic so far

  January February March
Cash Receipts      
Sales      
Issue of Shares      
Cash Payments      
Purchases      
Dividends      
Tax      
Non Current Assets      
Wages      
Cash Surplus/defecit      
Cash b/f      
Cash c/f      

Note that not all expenses in the income statement are cash eg depreciation/accruals.

Not all sales are cash - only put them in the table when cash is RECEIVED.

Not all purchases of NCA are cash eg Finance leases - just put in the cash PAID to the lessor.

When preparing cashflow forecasts make sure your work is clearly laid out and referenced to workings.

There is nothing difficult just needs practice

Illustration

  • A lady decides to set her own business so needs to go to a bank with a cashflow forecast. 

    She has £6,000 to invest herself. She expects to buy some non current assets for 10,000, which have a 5 year life. 

    These will be bought immediately.

  • Then she will need buffer stock of £1,000 acquired at the beginning of January and subsequent monthly stock to meet her expected sales demand

  • Forecast sales are 5,000 in February and rising by 10% per month. 

    Selling price is calculated using a mark up of 50%. 1 months credit is allowed by suppliers and 1 month given to customers also. 

    Operating costs are 500 per month plus drawings of 500.

Prepare a cashflow for Jan, Feb, March

  January February March
Cash Receipts      
Sales     5,000
Issue of Shares      
Cash Payments      
Purchases   -1,000 -3,333
Dividends      
Operating Costs -500 -500 -500
Non Current Assets -10,000    
Drawings -500 -500 -500
Cash Surplus/defecit -11,000 -2,000 667
Cash b/f 6,000 -5,000 -7,000
Cash c/f -5,000 -7,000 -6,333

Why might a forecast differ from the actual flows?

  • Poor forecasting techniques

  • Unpredictable events or developments, eg:

    (i) Loss of a major customer
    (ii) Insolvency of a major customer who owes the company money
    (iii) Changes in interest rates
    (iv) Inflation, which may affect various costs and revenues differently

NotesVideoQuizObjective Test