Cash Flow Forecasts Unit 5: Financial Planning

1. Cash Flow ForecastsUnit 5: Financial Planning

2. What is a cash flow forecast? • How are cash flow forecasts constructed? • How are cash flow forecasts used by businesses? • How is ICT used in cash flow forecasts? Learning objectives

3. Cash flow forecasts Cash flow is the money coming into a business (the income or inflows) and the money going out of the business (the expenditure or outflows).. A cash flow forecast is a prediction of the future flows of money in and out of the business for a specified period of time.

4. Inflows and outflows

5. Why do businesses forecast cash flow? Producing a cash flow forecast allows a business to plan how much money the business will have at any given time. This information can then be used to make decisions about business activities. Cash flow forecasts can be used to: • decide whether to expand or reduce existing activities • decide whether to produce new goods or services, invest in new resources or carry out new activities • identify any potential deficits and allow the business to plan ahead for them • identify any potential surpluses so that the business can use this money to their benefit.

6. Constructing a basic cash flow forecast

7. Complete a basic cash flow forecast

8. Constructing a basic cash flow forecast

9. Case study: Simon’s new car Simon Harris wants to buy a new car to take to university in September. He has estimated that a good second hand car will cost him £2500. Simon’s dad has agreed to give him £1500 at the end of August as an early birthday present, to help him buy the car. At the start of March, Simon had £450 in his bank account. He earns £150 a month working with his uncle. Simon is going to try and cut down on his spending. He estimates that he will spend £30 a month on clothes, magazines and music, and £25 a month socializing.

10. Case study: Simon’s new car

11. Case study: Simon’s new car The following information is what actually happened to Simon. Revisit the cash flow forecast on the next slide and decide whether Simon can still afford his car. • Simon spent £40 shopping in May and August. • He worked a few extra hours in June and earned £175. • He spent £80 going to a music festival in April. • He only earned £100 in March.

12. Case study: Simon’s new car

13. How does cash flow work? Ben Matthews is creating a cash flow forecast for his farm business, growing potatoes. He plants the potatoes in March and harvests them in September. Ben then sells them to the wholesaler and receives payment. Between March and September he has to pay for fertilizers, diesel for the farm vehicles, etc. What cash flow problems might Ben face?

14. Consequences of running out of cash • Staff may not be paid on time which can lead to de-motivation and conflict. • Creditors may not be paid on time, which may lead to stricter terms of credit in the future, or even no credit at all. In extreme cases creditors may take a business to court to reclaim what they are owed. • Suppliers can offer discounts for prompt payments and the business may not be able to take advantage of these.

15. Planning ahead Cash flow forecasts allow businesses to identify when they are likely to have a negative cash flow. This allows them to take actions to avoid or deal with the situation, e.g. by pre-arranging an overdraft. • Othermethods of avoiding cash flowshortages: • Reduce expenses (outflows) • Increaseincome (inflows) • Retimecapital expenditure What other solutions for managing or avoiding a deficit can you think of?

16. Notes • Cash FlowForecasting – what are thelimitations – page 497 • Causes of cash flowproblems • Poorcredit control p497 • Allowingcustomerstoolongtopay p499 • Expandingtoorapidly p499 • Unexpectedevents p500 • Activity 27.3 p498 and 499

17. True or false?

18. ICT and cash flow forecasts