Cash Flow

An example of the cash flow cycle

The figure above indicates that there is an obvious delay between the cash outflows and the cash inflows of the business. Therefore this means that a normal business will suffer cash flow problems. The extent to which this is a problem will depend on facts such as…

• the amount of cash held at the beginning of the cash flow cycle
• the length of time required to convert inputs into outputs
• the level of credit payments by customers
• the amount of credit offered by suppliers.

How to forecast cash flow

A cash flow forecast attempts to predict the future, whereas a cash flow statement tells you what actually happened in the past

Business’s use sources in order to compile a cash flow forecast

• previous cash flow forecasts
• recent cash flow statements
• consumer research
• study of similar businesses
• banks
• consultants
• the cash flow forecast itself

There can also be certain mistakes or inaccuracies made when compiling a cash flow forecast

• changes in the economy
• changes in consumer tastes
• inaccurate market research
• action by competitors
• uncertainty

Key features of a cash flow forecast include

• cash inflows: income from sales
• cash outflows: wages and purchase of raw materials
• net cash flow: (cash inflows-cash outflows)
• opening balance
• Closing balance: (opening cash balance+net cash flow)

an example of a cash flow forecast

 

 

So Why do businesses forecast cash flow?

• to identify potential cash flow problems in advance
• to guide the firm towards appropriate action
• to make sure there is sufficient cash to pay suppliers and creditors and to make other payments
• to provide evidence in support of the company being forced out of business because of a forthcoming shortage of money
• to identify the possibility of holding to much cash as the business can have more machinery and stock, so therefore they can have more output and make a greater profit