Cash Flow Forecasting

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Cash Flow Forecasting
http//www.bized.co.uk/learn/business/accounting/c
ashflow/simulation/index.htm
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Learning Outcomes

• Identify the components of a Cash Flow Forecast
• Construct a Cash Flow Forecast
• Analyse the reasons why Businesses draw up Cash
  Flow Forecasts

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What is Cash Flow?

• Cash Inflows
• Sales of products
• Bank Loans
• Grants
• Capital

• Cash Outflows
• Raw Materials
• Salaries
• Bills (heating)
• Interest on Loans
• CAPEX

What is the point of Cash Flow Forecasting?
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Structure of Cash Flow

• 1) Cash Inflows Sums of money received by a
  business during a period of time
• 2) Cash Outflows Sums of money paid out by a
  business during a period of time
• 3) Opening Balance How much money you start the
  month off with
• 4) Net Cash Flow Total Cash Inflow minus Total
  cash Outflow (1-2)
• 5) Closing Balance Opening balance plus Net
  Cash Flow (34)

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Constructing a Cash Flow Forecast
January February March
Cash In
Sales 120,000 100,000 200,000
Loans 30,000 - -
(1) Total Cash Inflow 100,000 200,000
Cash Out
Materials 20,000 30,000 20,000
Wages 50,000 50,000 50,000
Other costs 60,000 60,000 60,000
(2) Total Cash Outflow 140,000 130,000
(3) Opening Balance 0
(4) Net Cash Flow (1 2)
(5) Closing Balance (3 4)
150,000
?
?
130,000
?
?
20,000
(20,000)
?
?
(40,000)
70,000
20,000
?
?
(20,000)
50,000
20,000
Example of 3-month cash flow forecast
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Interactive Example

• Bobs lemonade Stall
• Bob Brown has set up his own lemonade stall
• He believes hes going to make a loada money
• Produce a cash flow forecast to predict if Bob
  will have any cash flow problems in the first 3
  months running his stall

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Interactive Example

• Bobs Information
• Bobs opening balance is 0
• To start-up Bob needs to buy a table and a banner
  costing 500
• Bob believes he will make 1000 in the June (1000
  units at 1)
• He then predicts sales will increase by 50 each
  month as people will want more Lemonade as it
  gets hot
• Bob buys a 3-month supply of sugar for 500 in
  June
• The other ingredients are lemons and water which
  he buys every month 200 in June, 300 in July
  and 450 in August

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Bobs lemonade Stall
  June July August
Cash In      
 Sales 1000 1500 2250
(1) Total Cash Inflow
Cash Out
 Banner and Table 500
 Lemons Water 200 300 450
 Sugar 500
(2) Total Cash Outflow
(4) Net Cash Flow
(3) Opening Balance 0
(5) Closing Balance
1) Cash Inflows Sums of money received by a
business during a period of time 2) Cash Outflows
Sums of money paid out by a business during a
period of time 3) Opening Balance How much
money you start the month off with 4) Net Cash
Flow Total Cash Inflow minus Total cash Outflow
(1-2) 5) Closing Balance Opening balance plus
Net Cash Flow (34)
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Bobs lemonade Stall
  June July August
Cash In      
 Sales 1000 1500 2250
(1) Total Cash Inflow 1000 1500 2250
Cash Out
 Banner and Table 500
 Lemons Water 200 300 450
 Sugar 500
(2) Total Cash Outflow 1200 300 450
(4) Net Cash Flow (200) 1200 1800
(3) Opening Balance 0 (200) 1000
(5) Closing Balance (200) 1000 2800
1) Cash Inflows Sums of money received by a
business during a period of time 2) Cash Outflows
Sums of money paid out by a business during a
period of time 3) Opening Balance How much
money you start the month off with 4) Net Cash
Flow Total Cash Inflow minus Total cash Outflow
(1-2) 5) Closing Balance Opening balance plus
Net Cash Flow (34)
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Over to you

• Complete Toys R Us Case Study individually!!!!
• Green points will be given to the first 3 people
  that complete it correctly!

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Results for Toys R Us Case Study
Toys R Us Ltd Nov Dec Jan Feb Mar Apr
Sales 300 300 150 50 50 50
Total Cash In 300 300 150 50 50 50
Purchasing Stock 200 0 0 200 0 0
Wages 50 50 50 25 25 25
Marketing 0 60 60 0 0 0
Total Cash Out 250 110 110 225 25 25
Net Cash Flow 50 190 40 (175) 25 25
Opening Balance 50 100 290 330 155 180
Closing Balance 100 290 330 155 180 205
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Why are Cash Flow Forecasts Important ?

• Owner of business needs to know how much cash
  will be needed in the first months of operation
  do I need to be more careful in certain months
  than others?
• Easier to obtain loans from banks if you show a
  cash flow forecast.

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Plenary - Key Terms

• Cash flow forecasting
• the process of estimating the expected cash
  inflows outflows over a period of time
• Cash inflow
• receipts of cash e.g. sales, interest received,
  loans received
• Cash outflows
• payments of cash e.g. purchase of items, loans
  repaid

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Plenary - Key Terms

• Net Cash Flow
• total cash inflows total cash outflows over a
  period of time (1 2)
• Opening Balance
• Shows the cash position of a Business at the
  beginning of the month (the Closing Balance of
  the month before)
• Closing Balance
• Shows the cash position of the Business at the
  end of the month - the Opening Balance Net Cash
  Flow (3 4)
• Brackets
• When numbers are shown in brackets it means they
  are Negative.

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Homework

• Complete Activity 8.4 on page 130.