What are Cash Inflows?
The amount of money coming into the business’s bank account
Examples include capital from investors, loans from banks, rent from property, or sales of products/services.
What are Cash Outflows?
The amount of money going out of the business’s bank account
Examples include rent, utilities, staff wages, buying stock, materials, equipment, and insurance.
Define Net Cashflow.
The difference between cash inflow and cash outflow over a specific time period
Example: Cash inflow £3000 per month, Cash outflow £2000 per month, Net Cashflow = £1000.
What is Cash Balance?
The amount of money forecasted to be in the bank account after net cashflow is added or subtracted
Example: Start of the month £2500, Net cashflow £1000, Cash Balance = £3500.
What is a Cash Flow Forecast?
A forecast of the cash flowing in and out of the business over a period of time
Helps identify potential problems in paying bills.
What is the purpose of a cash flow forecast?
To help the business manage the flow of money in and out
Ensures awareness of spending and cash availability.
Why is it important for a business to manage the timings of cash?
Payments need to be made after money has come into the business
Making payments before cash inflow can lead to insufficient funds.
List the benefits of cash flow analysis.
- Timing of expected revenue is known
- Timing of expenditure is known
- Warning for cash shortfalls
- Helps set a budget
Provides insights into financial health and planning.
List the risks of not using cash flow analysis.
- Unknown revenue timing
- Delayed payments to suppliers
- High interest on unauthorized overdrafts
- Business may cease trading
Can lead to financial instability and operational issues.
What are some disadvantages of cash flow forecasting?
- It is a forecast, not definite
- Prices can change, affecting accuracy
- Requires skills for calculations
- Can be time-consuming
These factors can impact the effectiveness of the forecast.
What factors affect the effectiveness of cash flow forecasting?
- Size of the business
- Issues with suppliers
- Unexpected costs
- Weaker sales due to changing consumer needs
- Investors refusing to invest
These factors can lead to inaccuracies in forecasts.
How is a cash flow forecast completed?
By entering inflows and outflows for a month, calculating net cash flow, and determining the closing balance
The closing balance becomes the opening balance for the next month.
What does a positive closing bank balance indicate?
The business should be able to pay its bills
A larger positive figure may indicate available funds for investment or expansion.
What does a small negative closing bank balance mean?
Money may have to be borrowed, at least temporarily
Indicates potential cash flow issues that need addressing.
What does a large negative closing bank balance indicate?
The business cannot pay its way and may have to close unless action is taken
Urgent measures are needed to reduce outflows or increase inflows.
What is another good reason to carry out a cash flow forecast?
It can help set a budget based on predicted cash inflows and outflows
Assists in financial planning and management.
What is the formula for calculating Closing Balance?
Opening Balance + Net Cash Flow
What is the formula for calculating Net Cash Flow?
Cash Inflows - Cash OutFlows
How do you calculate the Opening Balance of a new month?
Its the Closing Balance of the previous month
