Mr Stokes

To understand the meaning of cash flow

To understand why cash flow is important to a business

To be able to construct & interpret a cash flow forecast

Cash Flow Forecasting

Cash flow is the flow of money into and out of a business over a given period of time

A cash flow forecast is a prediction of how cash will flow into and out of a business over a given period of time

Why is Cash Flow So Important? “Companies don’t go bust because they

lose money, they go bust because they run out of money”

“Cash flow is the most common reason for business failure. It is estimated that 70% of businesses that collapse in their first year do so because of cash flow problems.”

Banks always request a cash flow forecast as part of a business plan when considering an application for a loan

An example: A business accepts an order for £50 000. It predicts costs of £40 000 and a profit of £10 000. Why might it face cash flow problems in completing the order?

Importance of Cash Flow£ cash flow

+20 000

+10 000

-10 000

-20 000

-30 000

-40 000

Materials Bought

Wages &

Overheads

Paid

Delivery to

Customer

Credit Period

(Wait for

Customer

To Pay)

Profit

Order received Producti

on

complete

Goods delivere

d

& Bill Presente

d

£50 000 payment received

from custome

r

Weeks0

0000000Closing Bank Balance

        

0000000Total Payments

0      Rent

0      Advertising

0      Wages

0      Stock

0      General expenses

       Expenses / Payments

        

0000000total receipts

0      capital introduced

0      Enterprise grant

0      loan

0      Sales revenue

       Incomes / Receipts

        

 000000opening bank balance

£££££££ 

TotalJun

May

Apr

Mar

FebJan  

Cash flow forecast

Add up all the expenses

Add up all the incomes

Opening Balance = last month’s closing balance

Closing Balance = incomes – expenses +opening balance

-£1,000-

£1,000£850£1,500£150Closing Bank Balance

      

£17,000£4,850£3,150£3,650£5,350Total Payments

£4,000£2,000  £2,000Rent

£400£200  £200Advertising

£4,000£1,000£1,000£1,000£1,000Wages

£8,000£1,500£2,000£2,500£2,000Stock

£600£150£150£150£150General expenses

     Incomes / Payments

      

£16,000£3,000£2,500£5,000£5,500total receipts

£2,000  £2,000 capital introduced

£1,000 £500 £500Enterprise grant

£3,000   £3,000loan

£10,000£3,000£2,000£3,000£2,000Sales revenue

     Incomes / Receipts

      

 £850£1,500£150£0opening bank balance

£££££ 

TotalAprMarFebJan  

Cash flow forecast4. Opening Balance = last month’s closing balance

3. Closing Balance = receipts – payments +opening balance

1. Add up all the incomes

2. Add up all the expenses

Quick QuestionWhy would a bank want to see a persons cash

flow forecast before lending them money?

Why?Why?

Task 1Using the worksheet as your information

source complete the cash flow forecast.

Answer the questions.

Answers

Task 2Using the worksheet as your information

source complete the cash flow forecast.

Answer the questions.

Answers