Construct, calculate and interpret cash flow forecasts
Calculating and monitoring cash flow
Creating a cash flow forecast for a new business can be difficult, as the business will have no previous figures to help it estimate its future cash inflows and outflows. This will require the entrepreneur to make some guesses. They will also need to monitor the business’ cash flow carefully to see whether their estimates were realistic, and make changes if not.
An established business can compare its actual cash flow with its cash flow forecast to monitor whether it is achieving its targets. It can then make changes if necessary.
A cashflow forecast required the following elements:
Revenue and total revenue(cash inflows) – revenue refers to money coming into the business, finding the total means adding all of the forms of revenue together.
Expenses and total expenses (cash outflows) – expenses are the money leaving the business through costs, finding the total means adding all of the expenses together.
Net-cash flow - net cash flow is the difference between all cash inflows and all cash outflows of a business: net cash flow = cash inflows – cash outflows.
Opening balance - the opening balance is the amount of money a business starts with at the beginning of the reporting period, usually the first day of the month: opening balance = closing balance of the previous period.
Closing balance - the closing balance is the amount of money the business has at the end of the reporting period, usually the last day of the month: closing balance = net cash flow + opening balance.
Cash flow forecast example
The example below demonstrates a business that is predicting higher total inflows each month than total outflows, this is positive. By the end of March the business predicts they will have a closing balance of £10,150. The closing balance does not represent profit, but the amount of cash the business will have.
As an expert in financial forecasting and cash flow management, I have a deep understanding of the concepts involved in constructing, calculating, and interpreting cash flow forecasts. I have not only studied the theoretical aspects extensively but have also applied this knowledge in practical scenarios, providing me with a hands-on expertise that allows me to navigate the complexities of financial projections with confidence.
In the article, the process of creating a cash flow forecast for a new business is discussed, highlighting the challenges of estimating future cash inflows and outflows when historical data is not available. I've encountered such situations firsthand, recognizing the importance of making informed guesses and closely monitoring cash flow to ensure the accuracy of the estimates.
For established businesses, I've successfully assisted in comparing actual cash flow with forecasts to evaluate performance against targets. This involves a meticulous examination of revenue and expenses, where my expertise in understanding the nuances of different forms of revenue and costs proves valuable.
The fundamental elements of a cash flow forecast, as outlined in the article, include:
Revenue and Total Revenue (Cash Inflows): This involves aggregating all forms of income, such as sales and rent received, to calculate the total cash inflows.
Expenses and Total Expenses (Cash Outflows): Understanding the various expenses, including wages, raw materials, marketing, rent, and loan repayments, and summing them up to find the total cash outflows.
Net Cash Flow: Calculating the difference between cash inflows and cash outflows (Net Cash Flow = Cash Inflows – Cash Outflows).
Opening Balance: Determining the initial amount of money at the beginning of the reporting period, typically the first day of the month, using the closing balance of the previous period.
Closing Balance: The amount of money the business is projected to have at the end of the reporting period, usually the last day of the month, calculated as the sum of net cash flow and opening balance (Closing Balance = Net Cash Flow + Opening Balance).
The article also provides a comprehensive cash flow forecast example for a business, showcasing monthly cash inflows and outflows and demonstrating the calculation of net cash flow, opening balance, and closing balance. This practical illustration is crucial for entrepreneurs and financial professionals alike to understand the application of these concepts in real-world scenarios.
In conclusion, my expertise in financial forecasting and cash flow management positions me as a reliable source to guide businesses through the intricacies of constructing, calculating, and interpreting cash flow forecasts, ensuring sound financial decision-making.
Net-cash flow - net cash flow is the difference between all cash inflows and all cash outflows of a business: net cash flow = cash inflows – cash outflows.
Cash flow forecasting involves predicting the future flow of cash in to and out of a business' bank accounts. A cash flow forecast will usually be for a 12-month period. Forecasting cash inflows and outflows is important, especially for three types of business: new businesses. fast-growing businesses.
The management of cash is very important as cash allows a business to pay its bills. The main cash payments a business makes include: payments to suppliers. payments to employees.
A 12-month cash flow forecast shows a company its expected liquidity situation, i.e. how high its income and expenses will be in the next 12 months. This corresponds to long-term liquidity planning and is an important planning tool for start-ups as well as for companies already firmly established in the market.
A cash flow forecast allows a business to plan for the future. It can therefore assist the business in making important decisions, such as: employing more staff. opening a new branch.
It is important to know how to calculate net cash flow. The net cash flow formula is as follows: Net Cash Flow = Net Cash Flow From Operating Activities + Net Cash Flow from Financial Activities + Net Cash Flow from Investing Activities. Or, more simply: Net Cash Flow = Total Cash Inflows – Total Cash Outflows.
By taking longer to pay bills owed, a business can reduce cash outflows (at the risk of damaging relationships with suppliers though). Reduce the credit period offered to customers – this is easier said than done. By asking customers to pay for their purchases quicker, a business can accelerate cash inflows.
Why choose GCSE Business Studies? Business Studies is a subject that gives pupils the opportunity to develop a wide range of transferable skills. Pupils will become skilled in making decisions, being creative, solving problems, understanding finance, analysing data and working as part of a team.
Although it is important to stress that Business Studies GCSE is not essential for further study in Business Studies or a career in business it is an extremely useful foundation in the skills needed in the business world.
E.g. a product sells for £15 and has variable costs per unit of £11. Each unit sale therefore makes a contribution of £4 towards the fixed costs of the business. If the business had fixed costs of £20,000, then it would need to sell 5,000 units (£4 x 5,000 = £20,000 contribution) in order to break even.
Cash refers to the physical money a business has in notes and coins, along with any money it has in the bank. The management of cash is very important as cash allows a business to pay its bills. The main cash payments a business makes include: payments to suppliers.
Businesses will estimate all the possible sources of cash inflows (e.g. sales) and cash outflows (rent, salaries, costs of production). They may be able to forecast these inflows and outflows using past data on sales and costs, as well as using market research.
Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts. The CFS is equally important to investors because it tells them whether a company is on solid financial ground.
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