### Forecasting Cash Flows - Teachmebusiness.co.uk

```Forecasting Cash Flows
Mr Flain
Lesson Objectives
• Understand the importance of cash flow
• Understand the difference between a cash
flow forecast and a cash flow statement.
• Be able to estimate cash flows
• Understand that a business needs to plan
to avoid cash flow problems arising.
What is cash in business terms?
• Key Term: Cash in a business is the notes
and coins they have and also the money a
• Key Term: Cash flow is the movement of
cash in and out of the business.
• Make a list of all of the money that would come into the
business of Mr LePlonk and Shelly Isfit in the first 6
months of trading. This money is known as inflow
• Make a list of all of the money that would go out of the
business of Mr LePlonk and Shelly Isfit in the first 6
months of trading. This money is known as outflow
• Set out your work in the table on the next slide.
How to set out your work
Jan-July 2010 (£)
Inflow/ Receipts
Leave these blank at the
moment
Outflow/ Payments
You should have included the
following - inflow
• From Sales
– Cash from sales
– Cash from credit sales (comes in after a time lag)
• From investors
– Cash from investors putting capital into the business
• From lenders
– Cash from a bank loan
• From disposal of assets
– E.g cash from disposal of assets e.g. selling cars.
You should have included the
following - outflow
• Paying creditors – these are people you owe money to
• Paying wages
• Paying rent
• Paying insurance
• Paying tax
• Paying interest on debts
• Purchasing items on credit (when you pay for them at a
later date)
What is Net cash flow
• Key Term: Net cash flow is the amount of
cash left over once the outflow/ payments
have been subtracted from the inflow/
receipts.
• Net cash flow = Inflow – Outflow
• Or
• Net cash flow = Reciepts - Payments
• Now calculate the net cash flow of each of
• Add this onto the end of the tables.
The importance of cash
• If a business does not have cash then the following
problems could occur. Copy this into your books
Business has a lack of cash
Business is unable to pay bills/staff
Suppliers stop delivering as
they have not been paid.
Business may be taken to court
because they can’t pay creditors
(people they owe money to)
(can no longer pay its debts)
What is a cash flow forecast?
• A business needs to plan to ensure it has
enough cash to survive. To plan for this a
business will create a cash flow forecast.
• Key Term: A cash flow forecast is a
prediction of how cash will flow in and out
of a business over a period of time.
Why would a business use a cash
flow forecast
• A business will use a cash flow forecast to
– See if the business expects to have a suitable
amount of cash to survive
– See if the business needs to take any actions
to avoid a shortage of cash in the business
– See how well the business should be
performing after a period of time.
– Show to the bank to discuss if a loan is
needed and how a loan would be repaid.
Building up a cash flow forecast….
Build up the forecast in your books
• We will do a cash flow forecast for 6 months from
January to June. Draw the following table to store all of
the inflow and outflow that we have seen so far.
(£)
Receipts
Payments
Net Cash
flow
Jan Feb
Mar
Apr
May
June
Building up a cash flow forecast….
Build up the forecast in your books
• Key Term: Opening balance is the amount of
cash in the business at the start of each month
(£)
Receipts
Payments
Net Cash
flow
Opening
Balance
Jan Feb
Mar
Apr
May
June
Building up a cash flow forecast….
Build up the forecast in your books
• Key Term: Closing balance is the amount of cash in the business at
the end of each month.
• The closing balance is calculated by adding the net cash flow onto
the opening balance
• Closing balance = opening balance + net cash flow
(£)
Jan Feb Mar
Apr
May
June
Receipts
Payments
Net Cash flow
Opening
Balance
Closing
Balance
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH
• Complete the cash flow forecast for Monsieur
LePlonk
(£)
Jan Feb Mar
Apr
May
June
Receipts
1,500 1,200 900
2,000
2,100
2,400
Payments
1,400 1,200 800
1,700
1,750
1,800
Net Cash flow
Opening
Balance
0
Closing
Balance
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH
• Complete the cash flow forecast for Shelly Isfit
(£)
Jan Feb Mar
Apr
May
June
Receipts
800
1000
700
700
500
400
Payments
600
700
800
800
700
700
Net Cash flow
Opening
Balance
0
Closing
Balance
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH
Questions
• Look at the cash flow forecasts for Monseir
LePlonk and Shelly Isfit.
• What would be the consequences to Shelly’s
business if her cash flow forecast is correct?
• What actions could she take to avoid any cash
problems?
• What could be a reason for Monsieur LePlonk’s
cash flow improving over the months?
```