Cash Flow Forecast 

The Importance of Cash 

To Pay Suppliers Overheads, and Employees 

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 
• overheads, such as rent, electricity and telephone bills. 

To Prevent Business Failure 

Failing to manage cash and cash flow can cause business failure. Even if a business has many customers, it can still have negative cash flow. 

There are two instances when a business can suffer cash flow problems: 

• at start-up, when large amounts of money need to be invested to get the business started, for example to pay for equipment, initial stock, rent, insurance, hiring, training and staff costs. 
• during rapid growth, when the business needs to grow quickly but cannot keep up with the cash being paid out, for example, if the business needs to find larger premises and invest in making them ready to move into. 

However, businesses can overcome these problems and have better control over their cash flow if it: 

• Keeps up-to-date records of financial transactions 
• Always plans ahead by producing accurate cash flow forecasts. 

The difference between Cash and Profit 

Not all cash paid into a business is profit. A business must pay its costs from the money that comes into it. Once all costs have been deducted from all revenue, the amount that is left is the business’ profit. 

Profit is usually calculated on an annual basis. However, calculating it monthly can help a business by showing that it is solvent and indicating whether it will be able to achieve its profit targets. 

Cash Inflows & Cash Outflows 

Cash Inflows – all of the money coming into the business, which can be separated into different categories, for example, sales, rent received and loans. 

Cash Outflows – all of the money moving out of the business to pay for its costs, for example suppliers, employees and overheads. 

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 Forecast 

Cash flow forecasting involves predicting the future flow of cash into and out of a business’ bank accounts. 

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.

A cashflow forecast requires 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. 

Why are Cash Flow Forecasts Important 

• ❖ Identifying cash shortages – helps in advance when a business might need to borrow cash
• ❖ Supporting applications for funding – helps lenders to support the business 
• ❖ Help when planning the business – helps to clarify aims and objectives 
• ❖ Monitoring cash flow – helps to compare with the actual cashflow