Cash-Flow Forecasting And Working Capital: The Importance Of Cash And Of Cash-Flow Forecasting (Copy)
Cheat Sheet: 5.2.1 Cash and Cash-Flow Forecasting
Why Cash is Important
| Reason | Explanation | Example |
|---|---|---|
| Pay day-to-day expenses | Wages, bills, suppliers | Factory paying electricity bill |
| Avoid insolvency | Without cash, business may fail even if profitable | Profitable shop closes due to unpaid debts |
| Seize opportunities | Buy cheap raw materials in bulk | Retailer buying stock in seasonal sales |
| Emergency cover | Handle unexpected events | Restaurant equipment breakdown |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Cash-Flow Forecast
| Aspect | Explanation |
|---|---|
| Definition | Prediction of future inflows & outflows of cash |
| Construction | Shows opening balance, inflows (sales, loans), outflows (wages, rent), closing balance |
| Importance | Identifies shortages/surpluses, helps planning, convinces banks to lend |
Example:
Opening balance = $2000
Inflows = $5000
Outflows = $4000
Closing balance = $3000
Interpreting a Cash-Flow Forecast
| Indicator | What it Means | Example |
|---|---|---|
| Positive balance | Business can pay bills | $3000 cash left at end of month |
| Negative balance | Shortage → needs action | –$1000 in April forecast |
| Timing issues | Inflows/outflows mismatch | Customers pay late, suppliers demand early |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course
Solving Short-Term Cash-Flow Problems
| Method | Explanation | Example |
|---|---|---|
| Bank Overdraft | Temporary borrowing from bank | Cover monthly wage payments |
| Delay Supplier Payments | Negotiate longer credit terms | Pay after 60 days instead of 30 |
| Encourage Debtors to Pay Quickly | Offer discounts for early payment | 5% discount if customer pays within 10 days |
| Reduce Expenses | Cut unnecessary costs | Delay non-essential purchases |
Quick Revision Bullets
- Cash = vital for bills, wages, survival, opportunities
- Cash ≠profit → business can fail without enough liquidity
- Cash-flow forecast = predicts inflows & outflows, used for planning & loans
- Negative balance = risk → solutions = overdraft, delay suppliers, speed up debtors
- Helps managers anticipate problems and act early
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Business Studies Full Scale Course