F2 Cash Flow Forecasts
Cash flow is the money entering and leaving the business over a period of time. A cash flow forecast is a prediction of future inflows and outflows over a period of time whereas a cash flow statement is a record of inflows and outflows that have already occurred.
A cash flow forecast is a prediction of the inflows and outflows of a business across a period of time in the future. A 12 month cash flow forecast will usually itemise the predicted inflows and outflow each month. This allows a business to anticipate periods of negative cash flow and take preventative action.
| Key Features of Cash Flow Forecasts | ||||
|---|---|---|---|---|
| September | October | November | December | |
| Opening Balance | 0 | (50,000) | (40,000) | 0 |
| Cash Inflows | 50,000 | 70,000 | 100,000 | 90,000 |
| Cash Outflows | 100,000 | 60,000 | 60,000 | 60,000 |
| Net Cash Flow | (50,000) | 10,000 | 40,000 | 30,000 |
| Closing Balance | (50,000) | (40,000) | 0 | 30,000 |
Cash inflows may include money received from cash sales and credit sales, loans, money invested by owners, grants and sale of fixed assets.
Cash outflows are the amounts of money leaving the business in different time periods. They may include premises costs, staff costs, costs of equipment and raw materials, loan and interest payments and vehicle costs.
Net cash flow is the inflow per time period minus the outflow for the same time period.
The closing balance is the net cash flow plus the opening balance. The opening balance for one time period is the same as the closing balance for the previous time period.
Constructing a Cash Flow Forecast
Opening balance = closing balance of previous month. For a new business, opening balance may be zero unless otherwise stated.
Net cash flow = opening balance + closing balance
Closing balance = net cash flow + opening balance
| Cash Flow Forecast for The Coffee Hub for the first year of operations (£) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| Opening Balance | 0 | (33,500) | (31,500) | (29,500) | (12,500) | (500) | 1,500 | 11,500 | 33,500 | 35,500 | 35,500 | 37,500 |
| Cash inflows | ||||||||||||
| Cash sales | 20,000 | 20,000 | 20,000 | 40,000 | 20,000 | 20,000 | 30,000 | 30,000 | 20,000 | 20,000 | 20,000 | 20,000 |
| Credit sales | 20,000 | 20,000 | 20,000 | 30,000 | 20,000 | 20,000 | 30,000 | 30,000 | 20,000 | 20,000 | 20,000 | |
| Total inflows | 20,000 | 40,000 | 40,000 | 60,000 | 50,000 | 40,000 | 50,000 | 60,000 | 50,000 | 40,000 | 40,000 | 40,000 |
| Cash outflows | ||||||||||||
| Raw Materials | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 |
| Wages | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 |
| Utilities | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||
| Business Rates | 5,000 | |||||||||||
| Accountant Fee | 3,000 | |||||||||||
| Rent of Premises | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |
| Advertising | 5,000 | 500 | 500 | 500 | 500 | 500 | 500 | 500 | 500 | 500 | 500 | 500 |
| Insurance | 4,000 | |||||||||||
| Maintenance | 10,000 | |||||||||||
| Miscellaneous | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 |
| Total outflows | 53,500 | 38,000 | 38,000 | 43,000 | 38,000 | 38,000 | 40,000 | 38,000 | 48,000 | 40,000 | 38,000 | 38,000 |
| Net cash flow | (33,500) | 2,000 | 2,000 | 17,000 | 12,000 | 2,000 | 10,000 | 22,000 | 2,000 | 0 | 2,000 | 2,000 |
| Closing Balance | (33,500) | (31,500) | (29,500) | (12,500) | (500) | 1,500 | 11,500 | 33,500 | 35,500 | 35,500 | 37,500 | 39,500 |
Causes of Negative Cash Flow
Ineffective marketing mix: An effective marketing mix involves strategies around the product, its price, its promotion and its place meeting the customer needs. Issues with the marketing mix can decrease popularity of the product reducing sales.
Intensive competition: In markets where there is a lot of competition. It is important that firms continue to invest in their competitive advantage or they risk customers switching to rival brands, reducing sales and revenue.
Late payments from customers: As a business has ongoing responsibilities in paying their own financial obligations, late payments from customers can lead to negative cash flow if payments are received after a supplier needs to be paid.
High Cost of raw materials: Costs of raw materials can increase when suppliers increase their prices or if there is excess wastage. It is important for firms to monitor any cause of waste and compare prices of all potential suppliers.
High operating costs: Increasing operating costs such as rent, wages and utilities can cause negative cash flow if they increase faster than rises in revenue. It is essential for firms to ensure that all resources such as staff, equipment and premises are being used at optimum capacity.
Overstocking: Holding more stock than is needed to meet customer demand can lead to cash flow issues. This is both due to the cash being tied up in the stock until it is sold and for the costs associated with storing stock such as rent, security and insurance.
Seasonal fluctuations: Firms that have much higher and lower sales at different times of the year may experience negative during their off peak seasons. This is because outflows such as rent, salaries and insurance still need to be paid when sales are not bringing in enough to cover them.
Debt obligations: Businesses that took out loans to cover any start-up or expansion costs may experience cash flow issues caused by the repayment of these loans. Loan repayments also incur interest.
Asset purchases: Although in the long run, purchasing an asset, such as a vehicle or some machinery, can work out cheaper. In the short-run, purchase rather than leasing can cause negative cash flow due to the large outflow in one transaction.
Actions to Address Negative Cash Flow Periods
Increase sales
Change pricing strategy
Reduce spending
Improve efficiency
Incentive early payments from customers
Negotiate payment terms with suppliers
Improve accounts receivable department
Use cash flow forecasting to make predictions
Use additional sources of finance
Benefits and Limitations of Cash Flow Forecasts
Benefits
Anticipate problems early so solutions can be found
Highlighting periods in advance where an overdraft might be needed to cover expenses
Use as evidence when applying for funding
Avoiding business ventures which are likely to fail due to poor cash flow
Limitations
The time it takes to construct them,
The reliability of the data used to input
The uncertainty of what will happen in the future
