UNIT 1 – Planning & financing a business

Financial planning Revision notes

USING CASH-FLOW FORECASTING

The nature of cash flow:

Cash flow: The amounts of money into & out of a business over a period
Page | 1 of time.
 Below is the pattern of inflows (money coming into business) &
outflows (money going out).
 Cash flow cycle:

A. Holding of cash
in the business

£
£ Outflows of cash to buy or hire
Inflows of cash in return for sale factors of production (land, labour,
of good and/or service capital & enterprise)

B. Use of factors of
production to make
goods/service

 Cash leaves the business between A & B and than flows back into
business between B & A
 There is a delay between outflows of cash & inflows of cash
 This means the nature of business activity that a typical business will
suffer cash flow problems

The extent of cash flow problem will depend on:

 The amount of cash held at the beginning of the cash flow cycle
 The length of time required to convert inputs into outputs
 Credit payments

Cash flow statement: A description of how cash flowed into &

out of business during a period of time.
Cash-flow forecasting: The process of estimating the expected
cash inflows & outflows over a period of time.
 UNIT 1 – Planning & financing a business
Financial planning Revision notes

 Study similar businesses e.g.

Sources for cash-flow competitors
forecasting:  Establishing the level of
resources needed
 Previous cash flow forecast
Page | 2   Banks
Cash flow statements
 Consumer research
 Consultants
 The cash flow forecast itself

Problems in cash flow forecasting

 Changes in economy
 Changes in consumer taste
 Inaccurate market research
 Competition
 Uncertainty

Structure of a cash flow forecast:

 Cash inflows: Income from sales, sales of assets, borrowings. Total
cash inflow
 Cash outflows: Raw materials, wages, bills & other costs. Total cash
outflow
 Net cash flow = total cash inflow – total cash outflow
 Opening Balance = The closing balance of the previous month
 Closing balance = Net cash flow + Opening balance
 UNIT 1 – Planning & financing a business
Financial planning Revision notes

Constructing a cash flow forecast

Page | 3

Why businesses construct a cash flow

 To identify potential cash-flow problems in advance
 To guide the firm towards appropriate action
 To make sure that there is sufficient cash available to pay suppliers &
creditors & to make other payments
 To provide evidence in support of a request for financial assistance
e.g. asking bank for an overdraft
 To avoid the possibility of the company being forced out of business
into liquidation because of a forthcoming shortage of money
 To identify a possibility of holding too much cash