BTEC Business - E1

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  • Created by: Kaicee05
  • Created on: 14-05-23 17:28

Cash Flow Forecast

Cash flow forecast - Tries to predict in advance the cash flow of a business. They'll be able to prevent shortages or put financial plans in place. Ususally done month by month. 

Why? 

- Warns of any shortages

- Makes sure they have enough for suupplies/ employees

- Sport problems with customer payments 

- Reassurance to investors 

- Prevents business failure

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Inflows

This is money coming into the business.

Cash sales - Customer pays at the time of purchase. 

Credit sales - Customer pays in a pre-agreed period after the sale, eg. 30 days. 

Loan - Bank loans money to fund purchases of an asset, eg. machinery.

Capital introduced - Money invested from savings, entrepreneurs or shareholders, eg. business starting up or expanding. 

Sale of assets - Selling items owned by the business that are no longer needed in return for immediate cash. 

Bank interest received - Interest paid by the bank on credit balances. 

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Outflows

This is money going out of the business.

Cash purchases - Items purchased by a business and paid for at the same time.

Credit purchases - Items purchased by a business and paid for at a later date.

Purchase of assets - Buying non current assets which will be kept for longer than a year. 

Bank interest paid - Interest collected due to borrowing money. 

Value Added Tax (VAT) - Businesses who are VAT registered have to pay VAT to HMRC. 

Rent - Regular payments to a landlord in exchange for use of a premesis. 

Rates - Business rates are a tax on a property used for business purposes.

Saleries - An annual sum paid to an employee which is split over a 12 month basis. 

Wages - Monthly pay to an employee based on an hourly work rate. 

Utilities - Costs for electricity, gas and water usage or prices for service from council. 

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Purpose and use of Cash Flow

Planning - Can plan what inflows and outflows are going to be. Plan how to utilise cash surpluses or manage months where it's negative. See where inflows/ ouflows are coming from. Put in a plan to rectify problems with cash flow. 

Monitoring - Need to be monitored closely in line with actual cash flow of the business. 

Control - When a concern comes up, the business can control it by attempting to increase inflow or decreasing outflow. Without the cash flow they wouldn't be able to control the issue until its occured. 

Target Setting - A cash flow forecast can help them set targets based on whats been identified. May be a seasonal business so make more money in specific months, eg. set a target of diversifying the product to achieve sales in months where they don't make as much. May identify their expenses as the problem and need to reduce rent/ wages payments. These could be targets to improve cash flow. 

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Benefits of a cash flow forecast

- Encourage planning for inflows and outflows. 

- Enable cash flow to be monitored and corrective action can be taken if necessary.

- Can be used as part of a business plan to help raise finance.

- Identifies in times of a negative closing balance, allowing the business to plan for these. 

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Limitations of a cash flow forecast

- Based on forecasts and therefore may be inaccurate.

 - Cannot plan for unexpected events such as a rise in the cost of raw materials. 

- Time taken to produce a cash flow forecast could have been spent on other tasks. 

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Problems with cash flow forecast

Problems occur with cash flow forecasts when business ouflows are greater than the opening balance plus their inflows, resulting in a negative closing balance. This means they won't have enough costs to meet payments that are due. 

Businesses are likely to receive both busy times and quiet times. These fluctuations are known as the cash flow cycle. Seasonal businesses suffer with these fluctuations quite severly. 

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Solutions to cash flow forecast

Overdraft Arrangements - A business with a fluctuaying cash flow cycle should be able to show it to a bank and make arrangements for when they have a negative balance. Some banks offer free overdraft facilities but they have to be pre agreed. Without an agreement it can be very expensive. 

Negotiating terms with creditors - Creditors are people that a business owes money to, normally because good ro services have been bought on credit. If they have cash flow problems they can negotiate a longer payment time, eg. 60 days. This would slow down their outflow. However may lose discounts for prompt or early payment. 

Reviewing and rescheduling capital expenditure - Having identified cash flow problems, the owner could review what outflows were being spent on. This may identify areas of expendisture which can be cancelled or postponed. It's difficult to do this if expenditure is on revenue items, eg. replacement stock. For capital expenditure they could postpone payments to buy a new vehicle, for exmaple. 

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