A cash flow forecast is a financial document that shows the expected movement of cash into and out of a business in a particular time period

Cash flow forecasts are based on 3 main concepts:

Cash inflowsCash outflowsNet cash flow

Money coming in

Comes from sales revenue (customers purchasing goods), payments from debtors, loans, interest earned from bank, sales of assets, rent earned from property owned

Referred to as receipts

Money going out

Cash leaves a business when the business needs to pay bills

A business needs to itemise their expenses: labour, purchasing stock, rent, texes, advertising, interest, etc

Referred to as payments, expenses, outgoings

The difference between the inflows and the outflows, in a particular period of time

A firm wants the net cash flow to be positive, however they may be able to service temporarily if they experience negative cash flow

Long term, inflows will need to be greater than outflows

If a business needs external finance, a bank or lender will want to see a cash flow forecast to help them decide whether or not to lend $$

Help managers anticipate and identify times when they will be cash poor. They can then work out strategies to deal with this (e.g. arrange a bank overdraft to get thru the period when outflows are expected to be more than inflows)

Assists with a business’s planning process.

Opening balanceThe amount of cash a business has at the

beginning of the trading period. The opening balance for one month will be the same as the closing balance in the previous month.

Closing balanceThe amount of cash a business has at the

end of the trading period.Closing balance = opening balance plus

net cash flow

Complete Question 3.16 (a, b) on page 231 of your textbook. Write your answers in your workbook.

Hint: do the cash flow forecast in pencil

What can Juma do to improve cash flow?

Cutting costs and cutting expenses is well within management’s control and can be quickly done (your fired)

Increasing revenues from sales is more difficult (but not impossible!)

Recalculate cash flow to see if your suggestions help