Cash Flow Forecasts:
A cash flow forecast is a document that shows the predicted flow of cash into and out of a business over a
given period of time. Normally 12 months.
Net cash flow = total income – total expenditure
Closing balance = opening balance + net cash flow
Benefits and limitations of cash flow forecasts:
+) Encourages planning for cash inflows and outflows
+) Enables cash flow to be monitored and corrective action taken if necessary
+) can be used as part of a business plan to help raise finance
+) identifies in advance times of negative closing balances allowing the business to plan for these
-) based on forecasts and therefore may be inaccurate
-) cannot plan for unexpected events such as a rise in the cost of raw materials
-) time taken to produce a cash flow forecast could have been spent on other tasks
Problems with a cash flow forecast:
Problems occur with cash flows when the business’s outflows are greater than the opening balance plus
the inflows, as this will result in a negative closing balance. This means that the business will not have
enough cash to meet payments that are due.
If a business has a negative closing balance, then they have debt to pay off. They may pay their expenses
and debts of using their cash reserves or borrowing more money to pay them off until they have more busy
times again in order to have a positive closing balance the next month if they are doing well enough.
Very few businesses have consistent cash flows throughout the year; they are likely to experience busy
quiet times. These fluctuations are known as the cash flow cycle.
A cash flow forecast is a document that shows the predicted flow of cash into and out of a business over a
given period of time. Normally 12 months.
Net cash flow = total income – total expenditure
Closing balance = opening balance + net cash flow
Benefits and limitations of cash flow forecasts:
+) Encourages planning for cash inflows and outflows
+) Enables cash flow to be monitored and corrective action taken if necessary
+) can be used as part of a business plan to help raise finance
+) identifies in advance times of negative closing balances allowing the business to plan for these
-) based on forecasts and therefore may be inaccurate
-) cannot plan for unexpected events such as a rise in the cost of raw materials
-) time taken to produce a cash flow forecast could have been spent on other tasks
Problems with a cash flow forecast:
Problems occur with cash flows when the business’s outflows are greater than the opening balance plus
the inflows, as this will result in a negative closing balance. This means that the business will not have
enough cash to meet payments that are due.
If a business has a negative closing balance, then they have debt to pay off. They may pay their expenses
and debts of using their cash reserves or borrowing more money to pay them off until they have more busy
times again in order to have a positive closing balance the next month if they are doing well enough.
Very few businesses have consistent cash flows throughout the year; they are likely to experience busy
quiet times. These fluctuations are known as the cash flow cycle.
