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Business Management( Studies) Worksheet

Cash Flow Forecasts
Good Books ( GB)

Jay Roy runs mini book shop Good Books (GB) specializing in IB diploma and Cambridge
IGCSE books and examination resources. Good Books ( GB) runs as a sole trader. To take
advantage of its good reputation, Roy is planning to open a second shop about 12
kilometers away from the current book shop.

Though GB has internal funds, Roy thinks that borrowing funds from a bank is a good
option to finance. Roy has approached his banker for the partial finance. The bank manager
has insisted Roy to produce cash flow forecasts for three months starting from April 2022.

Roy forecasts revenue and expenses for the first three months of the new book shop as
follows:

 Personal or internal funds $ 8 000.

 Bank loan at the start of the shop $ 10,000.
 Startup expenses (April 2022) $ 6 000.
 Monthly rent $ 1 200.
 Shop employees’ wages $ 800 per month.
 Monthly loan repayment $ 800 starting from June 2022
 One-time promotional expenses $ 600( April)
 Estimated monthly revenue $ 10 000 ( increases by 5 percent every month)

Questions:

(a) Explain two differences between cash and profit [ 4 marks] [4 marks]
(b) Prepare a monthly cash flow forecast for the first 3 months of operation
of the new shop. Comment on the projected cash flow forecast of the
new shop. [6 marks]
( c) Identify and explain two benefits of cash flow forecast as a planning tool
for Good Books. [4 marks]

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Suggested answers

(a) Explain two differences between cash and profit [ 4 marks]

Cash and profit are two different things that every business owner should know
well. The better you understand them under the broad umbrella of cash
management, the more successful your business will be. Mistaking cash for profit,
and vice versa, could be a serious misstep; a business can be highly profitable while
having a poor cash flow, while a healthy cash flow is not necessarily an indicator of
profitability

The difference between cash and profit is that cash is the money that a company
has in its bank account or in hand, while profit is the revenue of a company minus
the cost of goods sold and expenses (there are two types: Gross profit and net
profit)

Cash is what you need to run your business, while profit is what you can use to grow
your business.

From the accounting point of view, cash is considered as current asset while profit is
a liability.

Ultimately, cash and net profit measure different things. While profit is the goal –
and an indicator of financial health – cash is the lifeblood of an organisation,
keeping operations ticking over on a day-to-day basis.

(b) Prepare a monthly cash flow forecast for the first 3 months of operation [ 6 marks]
of the new shop. Comment on the projected cash flow forecast of the
new shop.
Answer is on the following page

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Good Books
Cash flow forecast for 3 months ( April, May and June)
Details April ($) May ($) June ($)
Opening bank balance (A) 8 000 19 400 27 900
Cash inflows:
Revenue 10 000 10 500 11 025
Bank loan 10 000 - -
Total cash inflows (B) 20 000 10 500 11 025
Cash outflows:
Startup expenses 6 000 - -
Monthly rent 1 200 1 200 1 200
Wages 800 800 800
Loan repayment - - 800
Promotional expenses 600 - -
Total cash outflows (C) 8 600 2 000 2 800
Net cash flow (D = B-C) 11 400 8 500 8 225
Closing balance (E= A+ D) 19 400 27 900 36 125

Forecast cashflow looks positive. Closing cash balance has been increasing month by month.
Hence, Good Books will not have any major cash flow or liquidity problems.

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(c ) Identify and explain two benefits of cash flow forecast as a planning tool [ 4 marks]
for Good Books.
A cashflow forecast is a financial forecast that predicts the future cash flows of a
business. It is an important tool for companies to analyze their performance and
identify potential risks.

With reference to Good Books (GB), two benefits are

Helps in planning

A cashflow forecast helps in planning for the future by providing a clear picture of
Good Book’s cash flow. It is a financial projection that helps in making decisions
about which assets to invest in, how much to spend on start-up expenses, wages,
shop rent, repayment of loan, etc. By forecasting these outflows and as well as
inflows from sales revenue, cash flow forecast helps Jay Roy to deal with any cash
surplus and cash shortages.

Good support document for financial assistance ( loan)

Cash flow forecast provides a good support for business like GB, where planning to
borrow loan from banks or financial institutions. This document enables the banker
to check on the possible cash inflows and outflows of the proposed new store and
check on the solvency and creditworthiness of the business.

Hence, a well-prepared cash flow forecast is a key to the success of a business. It

helps business owners to anticipate and plan for any potential changes in business
finances. A forecast can be used as a tool for financial planning, budgeting, and all
managerial decision making.

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