Forecasting Cash Flows
Recapped how businesses estimate revenues, costs and profits. Discussed the difference between fixed and variable costs. Used appropriate formulas to forecast profit and losses for the David Lutter case study
Explore what is meant by the term Cash flow Discuss the role and importance of cash in a business Recognise the difference between a cash flow forecast and a cash flow statement Appreciate how careful planning can minimise risk.
Cash and cash flow Cash is vital to a businesses success and includes notes, coins and money in the bank. Cash flow is: The flow of money into and out of a business
Cash inflows Cash Inflows are the cash coming into a business Cash from the individual Loan from the bank Cash from sales
Cash outflows is the cash going out of a business (the payments it makes to others) Wages & training Telephone, gas, electric & other bills Equipment & Stock Interest on loans Advertising Maintenance & repairs
Net cash Flow Net cash flow is the money left over when a business takes its outflows from its inflows. In other words, NET CASH FLOW IS: the receipts of a business minus its payments Example: If Nestle have 30,000 per month coming in and pay out 10,000 in costs, their NET CASH FLOW is 20,000.
Companies that no longer exist... 1. MFI 2. Royal Doulton (Waterford Wedgewood) 3. Zavvi Entertainment 4. HBOS Bank but rescued by government 5. Adams (children's clothing retailers) 6. Barratts and Priceless (shoe shop chain)
Companies that no longer exist... 7. Viyella (clothing business) 8. Passion for Perfume (retail chain) 9. Land of Leather (furniture) 7. Newcastle Productions (distributor of Findus foods) 8. Blooming Marvellous, (maternity-wear retailer) 9. XL Airlines
And of course...woolworths
The cash flow forecast allows businesses to plan their finances. It is a prediction of the money that will come into and out of the business. They use them to: 1. See how well they should be performing 2. To see if action needs to be taken to avoid a cash crisis 3. Help them apply for/secure loans from the bank Cash Flow Forecasts
Cash flow forecast for Music Box A new nightclub The OPENING BALANCE is: The cash balance at the start of the month The NET CASH FLOW is added to the opening balance to get the CLOSING BALANCE. The CLOSING BALANCE will become the opening balance for the next month The CLOSING BALANCE shows the CUMULATIVE CASH FLOW Cumulative cash is the build up of cash in a firms bank account
Music Box a brand new nightclub started with 250,000 capital Figures in 000s Aug Sep Oct Nov Dec Jan Cash at start 250 65 10 20 25 55 Cash in (receipts) 0 0 85 65 115 55 Cash out (payments) 185 55 75 60 85 60 Net monthly cash (net cash flow) (185) (55) 10 5 30 (5) Cumulative cash (closing balance) 65 10 20 25 55 50
The forecast is based on some key points Building work is finished by the end of September so that customers can start combining in in October. A launch party will bring the publicity and the customers needed for success. Costs will prove as expected, so the business never has to dip into the overdraft.
A successful cash flow forecast requires.. Accurate predication of monthly sales revenues Accurate prediction of when customers will pay for the goods they have bought. Careful allowance for operating costs and the timing of payments. Careful allowance for other flows of cash, such as cash out flows when purchasing assets such as land and inflows form raising additional capital perhaps from selling shares.
Cash flow problems What affects cash flow?
Factors affecting cash flow Sales Stock levels Factors affecting cash flow Costs Credit terms
Factors affecting cash flow Sales can change Costs can change Credit terms can change Stock levels can change
Music Box had NEGATIVE CASH FLOWS in August, September and January. Negative cash flow is also known as being IN THE RED. It happens when a businesses OUTFLOWS are greater than its INFLOWS. Negative cash flow
The forecast is based on some key points Building work is finished by the end of September so that customers can start combining in in October. A launch party will bring the publicity and the customers needed for success. Costs will prove as expected, so the business never has to dip into the overdraft.
Answer the questions 1. Give 2 benefits of cash flow forecasting for a new, small firm. (2) 2. Using the table; (a) explain briefly 2 reasons why the firms cash flow has fallen from 250,000 in August to 10,000 by September. (4) (b) Explain the likely effect on the firms cash position if the building work was not completed until November. (4)
The importance of planning Planning will help businesses to avoid cash flow problems. A strategy to avoid problems is GET IT Get the help/support of banks/investors E Ensure market research is thorough T Thoughtful cash flow planning will help I investigate where you get help spreading payments more evenly T Track the ACTUAL cash flow against the FORECAST
The Business Plan A business plan is a detailed development plan for a business. It includes information about the company s: Location Ownership Products/services Resources Production methods Marketing Financial details It is usually completed on a 2-5 year basis
Group Task In your groups decide on a company that you will start up. Using the company, draw up a business plan and include a cash flow forecast. Next week you will deliver a presentation to a very important panel (the bankers, who will decide whether or not to give you a loan). You must be able to justify your business plan details, decisions and forecasts. You should dress appropriately.
The plan must include: Section 1: The business idea The Business Plan Section 2: Resources and quality issues Section 3: Financial resources Section 4: Feasibility and evaluation
Quick Quiz What is the opening balance? What is the closing balance? What does the Net cash flow mean? What is the cumulative cash flow?