3.3 (20) Cash flow forecasting for business survival

Hi Year 10

10/10 key term test on the topic of cash-flow and survival

1. Cash - Money that the business has available to it straight away.  This would include cash in hand or money in its bank account.
2. Forecast - A technique where the business attempts to estimate future sales, cash flow or other financial variables.
3. Cash-flow forecast - A prediction or plan of the EXPECTED future cash, inflows and outflows from a business over a period of time.
4. Opening balance - The money the business has at the start of the month. It is the same as the closing balance from the previous month.
5. Receipts (cash in flows) - Cash that has come into the business during the month.
6. Payment (cash outflows) - cash that has been paid out to suppliers during the month.
7. Net cash-flow - The difference between the cash in and the cash out over a time period.
8. Closing balance - The amount of cash a business has available at the end of each month.
9. Cash-flow statement - This is a historic record of the ACTUAL cash inflows and cash outflows that have taken place over a period of time.
10. Insolvency - occurs when a business is not able to meet its financial commitments when they are due

Cash-flow forecasting is a very hands on topic but being able to calculate cash flow forecast tables is only half of the challenge.

A business will fail very quickly if it runs out of cash.  Cash flow forecasting ensures that you are looking at the months of the year when cash is both flowing into the business and hopefully at a rate quicker than it is flowing out.

Discussion

If a sole trader cannot pay a bill, creditors (people they owe money to) can take them to court.  If the court decides to make the person bankrupt, it can force the sale of his or her possessions in order to pay the bill.  Do you think that creditors which are often big companies like electricity suppliers should be allowed to do this? 

Cash shortages need to be identified so that you can do something about them before you run out of cash.  If you need to generate extra cash you need to be aware of when you will need to do this.  

• Cash flow forecasts allow a business to control the flows of cash
• Cash flows in and out of the business both when it starts up and when its operating
• Cash flow problems are one of the main causes of a business failure
• Businesses can help cash flow by increasing or spreading revenue.
• Businesses can help cash flow by decreasing or spreading costs.
• Cash flow forecasts are a powerful management tool.
• By identifying the months that have a negative net cash flow early can allow a business time to arrange additional sources of finance well in advance of it being required i.e. short term loans such as overdrafts etc or delay spending on capital items such as equipment !

Solutions to cash flow problems 

If a business has identified that it is short of cash it then needs to do something about it:

1. request an overdraft from the bank to bridge the termporary shortfall
2. Incentivise customers with a discount to pay up front when they order.
3. Incentivise with a discount that customers pay on delivery -   
4. Create other sales opportunities to sell other items to generate more cash
5. It could negotiate with its suppliers to pay later i.e. 30, 60 or 90 days after receiving the raw materials.
6. It could move to pay its staff monthly instead of weekly giving it an extra four weeks to raise the cash required to meet its payrol demands.
7. It could negotiate cheaper prices for raw materials (variable costs) and its fixed costs.
8. It could pay utility bills i.e. gas, electric and water monthly rather than when they land four times a year 

A level resources:

Cash-flow forecasting click here
Cash-flow problems - click here
Cash-flow solutions - click here


Nine mark question - click here

Good luck and enjoy

Mr T