Cash flow forecasts - CCEA

Key facts about cash flow

• Cash flow: movement of money in and out of a business

• Cash flow forecast: predicts future cash movements to aid planning

• Importance: vital for paying bills and avoiding financial issues

• Management: involves credit terms, cost control, and ensuring positive cash flow

The flow of money into and out of a business in a given time period

Money flows in from:

• sales

• owner’s capital

• loans

• government grants

Money flows out for:

• buying stock

• paying rent and electricity

• paying staff wages

• repaying loans

• marketing costs

Cash flow forecast: a prediction of how much money will flow into and out of the business over the next 6, 12 or 24 months.

Like a weather forecast, it is a PREDICTION: it has not happened yet!

To get to profitability, the business has to SURVIVE long enough to make a profit.

Cash doesn’t just mean the physical money a business has in notes and coins. It also refers to cash in the bank – in other words, money that is available in the business’ bank accounts.

The management of cash is very important as cash allows a business to pay its bills. The main cash payments a business makes include:

• payments to suppliers

• payments to employees

• overheads, such as rent, electricity and telephone bills

When a business has just a few large customers and they fail to pay on time, the business’cash flow position is badly affected because the business does not have money it was expecting to have. This can lead to the business having financial difficulties and even failing.

A business can arrange credit terms with its suppliers, in order to pay for raw materials or stock at a later date. Credit arrangements can also allow customers to pay for products or services within 30, 60 or 90 days. If a business allows its customers credit terms, it is a sensible option to also negotiate longer credit terms with its suppliers.

Failing to manage cash and cash flow can cause business failure. Even if a business has many customers, it can still have negative cash flow.

There are two instances when a business can suffer cash flow problems:

• at start-up, when large amounts of money need to be invested to get the business started, for example to pay for equipment, initial stock, rent, insurance, hiring, training and staff costs

• during rapid growth, when the business needs to grow quickly but cannot keep up with the cash being paid out, for example, if the business needs to find larger premises and invest in making them ready to move into

If a business has customers who are not paying what they owe, this means that the business may be unable to pay its own bills and may become insolvent.

Businesses need positive cash flow to reduce the risk of failure and insolvency. Three possible steps to get out of negative cash flow are:

• negotiate an overdraft facility

• keep costs under control

• keep cash coming into the business by arranging sensible credit arrangements with suppliers and customers, and having fewer customers who pay for products and services on credit

Cash flow is the movement of money in and out of a business over a period of time.

Cash flow forecasting involves predicting the future flow of cash in and out of a business’ bank accounts. A cash flow forecast will usually be for a 12-month period. Forecasting cash inflows and outflows is important, especially for three types of business:

• new businesses

• fast-growing businesses

• businesses with unpredictable sales patterns, for example seasonal businesses (eg an ice cream van)

A cash flow forecast allows a business to plan for the future. It can therefore assist the business in making important decisions, such as:

• employing more staff

• opening a new branch

• investing in a new business

• rewarding the owners for their success

Cash flow forecasting can also help a business to identify the risks of negative cash flow.

Creating a cash flow forecast for a new business can be difficult, as the business will have no previous figures to help it estimate its future cash inflows and outflows. This will require the entrepreneur to make some guesses. They will also need to monitor the business’ cash flow carefully to see whether their estimates were realistic and make changes if not.

An established business can compare its actual cash flow with its cash flow forecast to monitor whether it is achieving its targets. It can then make changes if necessary.

Calculating cash flow involves finding or estimating figures for the following:

• cash inflows - all of the money coming into the business, which can be separated into different categories, for example sales, rent received and loans

• cash outflows - all of the money moving out of the business to pay for its costs, for example suppliers, employees and overheads

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