Cash-Flow forecasting

Entrepreneurship

Gimnasio Campestre
Cash-Flow
forecasting
Business owners specially those setting
up a new business need to understand
the importance of cash. Making a
profit is good but it is cash that will pay
the bills.
Cash flow management is essential to
all business' survival. surveys of failed
businesses show that for more than
half of these the main reason for
failure was poor cashflow
management.
The importance of cash
and cash flow forecasting

Why cash is important to business

There is a saying “cash is king”. A business needs cash.
Without it the business will not be able to pay:

• it's employees wages

• it's suppliers for goods and services
• rent heating and lighting and other cost for its premises

Without cash, a business will fail.

How does a business make sure
it has enough cash to pay its
bills?

Most businesses operate cash flow management, which

means that they have the finance whenever they needed to
pay their employees or their suppliers and so on.
Managing a business cashflow involves making sure that
enough cash is coming into the business to cover the cash
that goes out of the business. For example, is there enough
cash from the sale of goods to cover the amount needed to
pay suppliers?
 Chinese home electronics company Dong Guan
Here are some Yufeng Co Ltd. Used its short-term cash flow to repay
business debts. This left it without enough cash to pay
examples of bank loans and suppliers - the business failed.
businesses
that fail African Catering business Premier Catering Supplies
because their Ltd, used Cash to buy shares in other companies.
Eventually it ran out of cash. Employees complained
owners did not about not being paid and the business failed.
manage the
businesses Dozens of Swissair aircraft stood grounded at Zurich
Unique Airport. Flights could not take off due to the
cash flow well. simple lack of cash flow. So little was available that
there wasn’t enough money to pay jet fuel.
What is
cash-flow
forecast.
All business activity results
in either a flow of cash into
the business or a flow of
cash out of the business.
The survival of any business
depends on the cash inflows
being greater than the cash
outflows.
 Jan Feb Mar
Cash Inflows Constructing a
Receipts 10 15 18 cashflow forecast
Total Inflow 10 15 18
Cash Outflows The following cashflow forecast shows the amount of cash
inflow and outflow each month. The difference between
Payment 7 27 12 the monthly inflow and outflow. The difference between
the monthly inflow and outflow is called the net cashflow.
For example, in January the business expects to receive a
Total Outflow 7 27 12 $10.000 cash inflow, but in the same month expects a
$7.000What is cash-flow forecast cash outflow. This means
Net cashflow 3 (-12) 6 that in January there Will be a net cashflow of $3.000
(10.000 - 7.000 = 3.000)
Opening 5 8 (-4) The closing balance in the cash-Flow forecast shows how
balance much cash the business expects to have at the end of each
month. If the closing balance is forecast to be negative then
this tells the management that the business Will have a
Closing balance 8 (-4) 2 cash shortage
 Jan Feb Mar
Cash Inflows Constructing a
Receipts 10 15 18 cashflow forecast
Total Inflow 10 15 18
Cash Outflows If a business knows in advancethat there is going to
be a period of cash shortage, it can take action to try
Payment 7 11 28 to prevent this from happening.
In the previous cashflow the negative closing
Total Outflow 7 11 28 balance in February is caused by the outflows being
much higher than the inflows. If possible, managers
Net cashflow 3 4 (-10) need to increase the inflows or reduce the outflows.

Opening 5 8 12 Lets assume that the payments for february include

balance the purchase of a new delivery van at a cost of
$16.000. If the decision to buy this vehicle is delayed
by one month then the amended cash-flow forecast
Closing balance 8 12 2 will look like this:
 Jan Feb Mar Apr May Jun

Cash Inflows

Activity 1 Receipts

Total Inflow
12

12
14

14
14

14
18

18
26

26
29

27

The following Cashflow forecast has Cash Outflows

been produced by the finance
Payments 16 18 18 20 20 22
manager of Lucky Charm Jewellers
(LCJ).
Total Outflow 16 18 18 20 20 22
1. Calculate the closing balance
for both May and June. Net cash flow (-4) (-4) (-4) (-2)
2. Comment on the forecast cash
Flow por LCJ between Opening balance 10 6 2 (-2)
Janueary and June.
3. How could the finance Closing balance 6 2 (-2) (-4)
manager use the cashflow
forecast to better manage LCJ’s
cashflow?
Activity 2
1. Explain why cash is important to a
business
2. Why is it important to forecast its
cash flow?
3. How might a business finance a
short-term cash shortage?
Activity
3