1. BUSS1
1.13 Using cash flow
forecasting

2. What is cash flow?
The amounts of money flowing into
and out of a business over a period
of time
NB CASH FLOW IS NOT THE
SAME THING AS PROFIT

3. What are cash inflows?
Receipts of cash
Cash flows into a business from:
- sales of goods and services
- payments by debtors (people who OWE the
business money)
- money received from loans from the bank
- interest received from cash in the bank
- sales of assets (things the business owns)

4. What are cash outflows?
Payments of cash
Cash flows out of a business from:
- purchase of raw materials and wages etc
- money paid to creditors (people to whom
the business owes money)
- money used to repay loans to the bank
- payment of rent
- buying assets
- payment of interest on loans

5. Visualising cash flow
The difference between the amount
of money flowing into a business
and the amount flowing out is
important
See what happens when there is a
positive cash flow
See what happens when there is a
negative cash flow

6. Cash flow forecasting
The process of estimating the
expected cash inflows and cash
outflows over a period of time

7. Why forecast cash flow?
To identify likely cash flow problems
- to ensure that bills can be paid
To enable the firm to plan expenditure
- to ensure expenditure takes place
when there is sufficient cash
To allow time to seek additional cash
- to seek overdraft facility from a bank
or a loan to cover major expenditure
To avoid going into liquidation
- businesses that can’t pay their bills
face liquidation

8. Constructing a cash flow
forecast
Key terms:
Opening balance – amount of cash the
business starts with in any month or year
Cash inflow – money coming in
Cash outflow – money going out
Net cash flow – difference between money
coming in and money going out
Closing balance – the opening balance + net
cash inflow

9. Task 1
Complete the cash flow
forecast for Fun for Kids
Ltd on p117 and 118 of your
textbook

10. Causes of cash flow problems
Seasonal
demand
Losses Too many
credit sales
Overtrading
Over-
investment
The
unforeseen
Too high
stock

11. Perils of cash flow forecasts
Changes in the
economy
New
competitors
Changes in
consumer tastes
Poor market
research
Uncertainty

12. Task 2
Using pp113 – 115 of your
textbook create a mind map
of the different ways in
which cash flow can be
improved
Identify the pros and cons
of each method

13. Task 2
Class discussion of Practice
Exercise 2: Fun for Kids
Ltd, Qs 2 - 4

14. Task 3:
Case Study: VKP Limited
pp118 - 119
Qs 1 - 5

15. Homework assignment
Question 1:
What is meant by the term
‘cash outflow’?
Use your textbook here to reproduce an
accurate definition

16. Homework assignment
Question 2:
Identify two other items
that could be included under
the heading ‘cash inflows’
Refer to the textbook definition of
cash inflows and list two cash inflows
other than sales revenue

17. Homework assignment
Question 3:
Calculate
(a) VKP’s predicted
‘purchases’ in August
Cash outflows = £64,000
Wages, drawings, admin costs = £8,000
Purchases = £64,000 - £8,000
= £56,000

18. Homework assignment
Question 3:
Calculate
(b) VKP’s closing balance in
December
Closing balance
= Opening balance +/- net inflow
= £100,000 - £51,000
= £49,000

19. Homework assignment
Question 4:

20. Homework assignment
Question 4:
Reasons include:
No credit terms
No need to hold stock
Credit received on stock
Few seasonal variations
VAT second largest outflow

21. Homework assignment
Question 5:

22. Homework assignment
Question 5:
Suggest at least 2 implications
Apply them to the case
Explain / analyse them
Make a judgement on them and
conclude

23. Homework assignment
Question 5:
Aim to balance your answer
Disadvantages
Likely to worsen cash flow in
short term
Increases the risk of bad debt
Increase admin costs

24. Homework assignment
Question 5:
Aim to balance your answer
Advantages
May increase sales
May earn interest on credit

25. Homework assignment
Question 5:
Don’t forget to make
judgements
Definite decrease in cash flow
vs potential increase in profit
Cash flow currently stable
Closing balances not very large
Need for overdraft