Mastering Cash Flow Forecasts in Accounts & Finance

1. Accounts & Finance Working Capital

2. Learning Objectives • Define working capital and explain the working capital cycle • Prepare a cash flow forecast from given information • Evaluate strategies for dealing with liquidity problems

3. Cash Flow Forecasts • A financial document that shows the expected movement of cash into and out of a business Based on 3 key components • Cash Inflows (Any money coming into the business, sales revenue, bank loans) – Sometimes called receipts • Cash Outflows (payments, expenses, outgoings) – sometimes called payments • Net Cash Flow – Difference between cash inflows and cash outflows 2 essential components • Opening Balance – Amount of cash at the beginning of a trading period (Will be the same as the previous months closing balance) Sometimes the case study will provide you with the first months opening balance otherwise it is usually 0 • Closing Balance – Amount of cash at the end of a trading period (Opening balance + net cash flow)

4. Reasons for cash flow forecasts • Investors require a cash flow forecast in order to help them better assess the financial health of the business • Can help managers anticipate difficulties • Aids planning process • But remember…it is a forecast

5. Sometimes the opening balance is at the top…like on the next example MINUS EQUALS

6. minus

7. Cash Flows Benefits Limitations Mistakes when preparing revenue and costs forecasts – inexperienced staff Unexpected cost increases Wrong assumptions Inaccurate research Demoralised workforce • By showing periods of negative cash flow, plans can be put into place to provide additional finance • If negative cash flow appears too great, plans can be put into place to reduce There can be many limitations, at the end of the day, it’s a FORECAST

8. Causes of cash flow problems • One of the problems with having a long working capital cycle is that the business has to pay for expenses well in advance of receiving any cash inflows • If this problem is stretched out it can lead to liquidity problems

9. Main causes of cash flow crises: • Overtrading – Expanding too quickly without the sufficient resources • Over borrowing – High cash outflow • Overstocking – Business is holding too much stock, stock costs money to buy, produce and store • Poor credit control – Too much credit given to customers • Unforeseen changes - PEST

13. Task • Working individually and in pairs complete the following tasks, you should BOTH have a copy of your answers • It is important to firstly read the question properly • Secondly, extract the information required – remember examiners love to overload you with information, half of which you DON’T need • Finally, create your tables in pencil in case of any mistakes