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Cash Flow Forecasting

Cash Flow Forecasting

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Cash Flow Forecasting

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  1. Cash Flow Forecasting AS Business Studies Business Accounting

  2. The Importance of Cash Flow

  3. Cash Flow Forecast A Cash Flow Forecast is a prediction of the future cash inflow (revenue) and cash outflow (costs) of a business

  4. The Purpose of Cash Flow Forecasting Cash Flow Forecasting has 2 main purposes: • To help avoid unexpected cash flow crises. By forecasting cash flow a business can see any future cash shortages and take action to overcome this problem • To support applications for loans. Cash flow forecasts give banks more confidence that the business will be able to make necessary repayments

  5. Cash Flow Forecast Construction • Total Cash Inflow: The sum of all income received by the business • Total Cash Outflow: The sum of all expenditure (costs) • Net Cash Flow = Total Cash Inflow – Total Cash Outflow

  6. Cash Flow Forecast Construction • Opening Balance: The amount of cash the business holds at the start of the month. It is equal to the value of the closing balance of the previous month • Closing Balance: The amount of cash the business holds at the end of the month. Closing Balance = Opening Balance + Net Cash Flow

  7. Why is cash important to the business Cash is the ´life blood´ of the business, it is required to- • Pay bills such as overheads • Pay the worker´s wages • Pay for supplies • Repay the business debts Many businesses , that on paper appear profitable, fail due to a lack of cash

  8. Interpreting a cash-flow forecast • Negative net cash flows may not be detrimental to the business provided that they do not result in negative closing balances. However, they may indicate that the business will have future problems • Negative closing balances are always detrimental regardless of their duration. If a business runs out of cash, it will not have the finance to pay its everyday costs and therefore may be unable to produce the goods that will generate future revenue