Cash Flow Forecast

Cash Flow Forecasts

These look at all the money coming into and leaving the business, usually over the next 12 months.

Why produce a cash flow forecast?

• If you want a loan from the bank, the bank will insist on a cash flow forecast to ensure the firm can pay the money back.
• It's a good way of anticipating any future money problems before they occur.
• It's a useful way of asking 'what-if' questions.

Limitations of a cash flow forecast:

• Actual figures are likely to be different.
• The longer the time period, the less accurate the forecast.
• Some figures the firm has no control over.
• Price could change.
• Demand could be affected by external factors.
  •  
    • Recessions.
    • New competitors.
    • Fashions and tastes changing.
• Fixed costs could change.

When a firm has predicted cash flow problems, what can it do?

• Try to increase sales through marketing.
• Increase price. More money will come in, but sales may drop.
• Change to cheaper suppliers. Although quality may suffer.
• Reduce other costs.
• Ask the bank for an overdraft facility.
• Extend your trade credit by asking your suppliers for longer to pay.
• Change your business strategy.