Objectives of cash flow forecasting
Ensures that sufficient funds will be available when needed to sustain the activities of a business
Must consider in cash flow forecasting (4)
- How much cash is required
- When it is required
- How long it will be required for
- Whether it will be available
Objectives of cash flow forecasting (4)
- Financial control
- Capital budgeting
- Maximise interest earnings
- Minimise cost of borrowing
Short term surplus management action (3)
- Pay accounts payable early to obtain discount
- Make short term investments
- Attempt to increase sales by increasing accounts receivable and inventories
Short term deficit management action (3)
- Delay payments to suppliers
- Improve collection of overdue payments
- Arrange overdraft facility
Long term surplus management actions (5)
- Make long term investments
- Expand
- Diversify
- Replace/ update non-current assets
- Distribute surplus to shareholders
Long term deficit management actions (2)
- Raise long-term finance
- Consider shutdown/ disinvestment opportunities
Difficulties with cash flow forecasting (3)
- Based on estimates
- Uncertain business environment eg unforeseen changes
- Historic information - not applicable to new/ rapidly growing businesses
Receipts and payments method
Short term forecasts
Based on expectation of individual cash flows
Cash flow method
Long term forecasts
Based on budgeted statements
Short term forecast objective <30 days
To identify cash receipts and payments to aid day-to-day management of cash flow
Medium term forecast objective > 1 month - 1 year
To establish overall cash averages to give a feel for overall funding
Long term forecast objective > > 1 year
Considers longer term strategy of the company
Sensitivity analysis variables (3)
- Currency fluctuations
- Rates of inflation
- Rates of interest
Forecast sources of information (5)
- PY actual cash flows
- Revenue projections
- Purchase projections
- Accounts payable/ receivable data
- Investment plans
Output VAT
VAT on the sale of goods and the provision of services
Input VAT
VAT on the purchase of goods and payment of expenses
Depreciation in cash flow
Should be ignored
Interest rates cash flow
Often annual - will need updating
Cryptocurrencies > advantages (2)
- Lower transaction cost
- Blockchain is self-verifying
Cryptocurrencies > disadvantages (2)
- Hit by scandals
- No central bank governance
Working capital
Capital available to fund the day-to-day operations of an entity
Working capital cycle
Days inventory + Days trade receivables - days trade payables
Working capital cycle shows
Time period between cash going out and coming into business
