Cash flow forecasts student handout - by fjzhangxiaoquan


									Cash flow forecasts
An accurate cash flow forecast is an asset as essential as an online presence or a key staff member. In fact, it’s
a vital cog in the financial machine which can quite literally inspire confidence in you and your business. At its
core a cash flow forecast simply predicts for a given period:
        The amount of cash going into your business
        The amount going out
        And the amount you have left
It sounds quite underwhelming, but cash budgeting is a powerful tool. It allows you to prepare for any shortfalls in
the future and it shows investors you know what you’re talking about – inspiring confidence all round. Cash flow
records are usually provided as spreadsheet documents which accompany the Final Accounts (containing a
Trading, Profit and Loss Account, and a Balance Sheet). Together, they form the core financial documents for a
company. A cash flow forecast takes exactly the same structure as a cash flow record.

        Forces small business owners to think ahead
        Helps them see when commitments are due and whether money is available to meet them
        Reveals weaknesses in debt collection policy
        Shows periods where shortages of cash may occur and when their might be excess cash
        Gives them the ability to undertake a comparison with actual results

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                             If…                                                       Outcome
The cash flowing into the business exceeds the cash
                                                              …the business can continue to operate.
flowing out…

                                                              …the business eventually runs out of cash and
The cash flowing out of the business exceeds the cash
                                                              creditors may seek to have the business liquidated to
flowing in…
                                                              recover their losses.

In financial terms, ‘cash’ doesn’t just refer to the notes and coins in the register at any one time – its financial
definition covers any current asset which can be accessed immediately or in the short-term to pay an urgent debt
or bill. Having these funds on-hand is known as having ‘liquidity’ in a business.

                            CASH                                                      NOT CASH
                         Day’s takings                                                  Property
                     Inventory item                                                   Ledger of debt
                 Short-term investment                                       Locked-in term investment


    1. Identify cash in
         It is essential when building a forecast to make sure the data you enter is as accurate as possible, so try
         to make sure you cover all the bases of possible cash-in and cash-out sources.
         Cash sales, cash deposits in advance, debtors paying back credit, interest received on savings,
         commissions, sales of assets and injections of capital (from a loan, for example) should all be recorded
         as ‘cash in’.

    2. Identify cash out
         Cash and credit purchases (the latter figuring in the month of payment), other cash expenses (such as
         wages or power), on-going regular payments (like rent), and infrequent costs (like annual insurance
         payments or provisional income tax payments) should all be recorded as ‘cash out’. Depreciation,
         however, is not a cash expense and is ignored.

    3. Calculate net cash flow
         Cash inflow – cash outflow = net cash flow

    4. Adjust the bank balance each month
         Add net cash flow to the month’s opening bank balance to estimate the bank balance at the end of the
         month. Compare cash flow projections against actual cash flows each month and adjust the closing
         bank figure – if you don’t all subsequent months will start with an inaccurate cash balance.

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Financial accounts are prepared exclusive of GST but bank records aren’t. You can either:
       Strip all GST out, using the net revenues and expenses from your Profit & Loss budgets.
       Use GST-inclusive figures, making comparison to your bank statements easier (however, remember to
        include your regular GST returns, such as GST to pay and GST refunds).

       Collect overdue accounts and other money lent by the business
       Eliminate delays in invoicing customers
       Sell off excess stock (but not in a manner which damages your present market)
       Sell investments and excess fixed assets
       Consider factoring your debtors
       Consider ‘sale and leaseback’ of fixed assets

       Reduce costs
       Defer any payments which can be delayed
       Cancel any proposed trading commitments
       Restructure debt
       Reduce the level of payments to owners

         (for further detail on cash flow forecasting)
         (for managing cash flow

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