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Chapter 32-Cash Flow Forecast

The document summarizes a cash flow forecast, which predicts expected cash receipts and expenses over time to show expected cash balances. It interprets key elements like cash inflows, outflows, and net cash. The cash flow forecast is useful for identifying potential cash shortfalls, ensuring ability to pay suppliers and employees, and spotting customer payment issues. It also promotes financial planning and may be required by banks. However, cash flow forecasts are based on estimates so can be inaccurate if assumptions are wrong or external factors change. They also require time and costs to prepare.

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24 views

Chapter 32-Cash Flow Forecast

The document summarizes a cash flow forecast, which predicts expected cash receipts and expenses over time to show expected cash balances. It interprets key elements like cash inflows, outflows, and net cash. The cash flow forecast is useful for identifying potential cash shortfalls, ensuring ability to pay suppliers and employees, and spotting customer payment issues. It also promotes financial planning and may be required by banks. However, cash flow forecasts are based on estimates so can be inaccurate if assumptions are wrong or external factors change. They also require time and costs to prepare.

Uploaded by

Rance
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 32

Cash flow forecast


It is the prediction of all expected receipts and all expenses of a business over a future time
period, which shows the expected cash balance at the end of each period.

Interpreting cash flow forecast

Cash flows are the likely receipts of cash

Cash out flows are the payments likely in the future

Net cash is the difference between the cash inflows and total cash outflows.

Opening balance is the amount of cash that the business has at the beginning of each month

The closing balance is the addition of net cash flow and the opening balance
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The use of cash flow forecast

 Identifies potential shortfalls in cash balances in advance – think of the cash flow
forecast as an "early warning system". This is the most important reason for a cash flow
forecast

 Makes sure that the business can afford to pay suppliers and employees. Suppliers who
don't get paid will soon stop supplying the business; it is even worse if employees are
not paid on time

 Spot problems with customer payments – preparing the forecast encourage the
business to look at how quickly customers are paying their debts. Note – this is not
really a problem for businesses (like retailers) that take most of their sales in cash/credit
cards at the point of sale

 As an important discipline of financial planning – the cash flow forecast is an important


management process, similar to preparing business budgets

 External stakeholders such as banks may require a regular forecast. Certainly if the


business has a bank loan, the bank will want to look at cash flow forecasts at regular
intervals

Limitations of cash flow forecast

 Cash flow forecast’s information is based on estimates / are predictions. If wrong


estimates, net cash flow & closing balance also go wrong. (Incorrect assumptions can be
made e.g. based on poor market research, incorrect assumptions lead to inaccurate
cash flow estimates)
 Business activity is subject to external changes (ex: exchange rate, interest rates, etc.) so
predictions may also go wrong.
 Cash flow forecast preparation is time-consuming & costly.
 Cash flow forecast focus on one variable (cash), no concern for other important ones
(ex: profit margins, productivity, etc.)
 The forecasts themselves may have been inexpertly drawn up.
 Inflows and outflows may be under-estimated or over-estimated e.g. unexpected costs
may arise. (There may be window dressing in order to inflate the cash flow forecast)
 Revenue inflows can fluctuate significantly with demand.
 Expense outflows can fluctuate with supplier price changes.
 Not done correctly lead to wrong decisions.
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Jan Feb March April


Cash inflows
Home sales 124000 124000 125000 128000
Export sales 62000 63000 66000 72000
Interest 3000 3000 3000 3000
Total cash 189000 190000 194000 203000
inflows
Cash outflows
Wages 55000 57000 57000 57000
Materials 76000 71000 75000 81000
Insurance 4000 4000 4000 4000
Drawing 21000 21000 21000 21000
Other overheads 24000 27000 28000 30000
Tax payment 11500
Total cash 180000 191500 185000 193000
outflow
Net cash flow 9000 (1500) 9000 10000
Opening balance 12300 21300 19800 28800
Closing balance 21300 19800 28800 38800

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