F2 Analysis of Cash Flow Forecasts
Cash flow problems arise when a business has more outflows than inflows. Without another source of finance, a business may not be able to pay its debts and become insolvent.
Reasons for negative cash flow include low sales through poor marketing or unexpected changes in the market, late payments from customers or offering long credit terms, holding too much stock, high spending on assets, high costs of raw materials and over staffing.
Actions that can be taken by a business to address cash flow difficulties. Cash flow can be improved by increasing sales through promotion or changes to prices or decreasing costs through making deals with suppliers and improving efficiency. The timings of inflows and outflows can be adapted to improve cash flow, for example giving incentives to customers to pay sooner or negotiating longer credit terms with suppliers will improve cash flow. For short periods of negative cash flow a business may decide to arrange an overdraft or business loan. Where large expenditure on capital items such as vehicles and equipment cause negative cash flow, a firm may decide to rent the item or use hire purchase to spread out the payments.
Benefits and Limitations of Cash Flow Forecasts
Benefits of cash flow forecasts include anticipating problems early so solutions can be found, being able to use as evidence when applying for funding, highlighting periods in advance where an overdraft might be needed to cover expenses and avoiding business ventures which are likely to fail due to poor cash flow
Limitations of cash flow forecasts include the time it takes to construct them, the reliability of the data used and the uncertainty of what will happen in the future making them potentially unreliable.
