5.2.1 The importance of cash and cash flow forecasts (3)
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1.
Question 2
The following is an extract from a cash flow forecast for a new online business. (Figures in £)
| Month | Cash In | Cash Out | Net Cash Flow |
| Month 1 | 2000 | 2500 | -500 |
| Month 2 | 2500 | 2000 | 500 |
| Month 3 | 3000 | 2800 | 200 |
Identify any potential problems highlighted by this cash flow forecast. Suggest two actions the business owner could take to address these problems.
Potential Problems: The business experiences a negative net cash flow in Month 1, indicating a cash shortfall. This could lead to difficulties in paying bills and potentially hinder the business's growth.
Actions to Address Problems:
- Reduce Expenses: The business owner could review and reduce expenses, particularly in Month 1, to improve the cash flow. This could involve negotiating better deals with suppliers or reducing marketing spend.
- Increase Cash Inflows: The business owner could explore ways to increase cash inflows. This could involve offering discounts to encourage faster payments, improving marketing to attract more customers, or offering new products or services.
2.
Consider a small retail business. Create a simplified cash flow forecast table for the next three months. Include the following categories: Cash Inflows (Sales), Cash Outflows (Rent, Salaries, Stock Purchases). Assume the business starts with £5,000 in the bank. (You do not need to calculate specific amounts, just show the structure of the table).
Here's a simplified cash flow forecast table for a small retail business over three months:
| Month | Cash Inflows (Sales) | Cash Outflows (Rent) | Cash Outflows (Salaries) | Cash Outflows (Stock Purchases) | Net Cash Flow | Closing Cash Balance |
| Month 1 | £ | £ | £ | £ | £ | £ |
| Month 2 | £ | £ | £ | £ | £ | £ |
| Month 3 | £ | £ | £ | £ | £ | £ |
Note: The initial cash balance of £5,000 would be the starting point for the closing cash balance in Month 1.
3.
Question 3
Sarah is planning to start a small catering business. She has prepared the following simplified cash flow forecast for the first month. (Figures in £)
| Item | Cash In | Cash Out |
| Customer Payments | 4000 | |
| Ingredients | | 1500 |
| Equipment Hire | | 500 |
| Marketing Costs | | 200 |
Calculate Sarah's net cash flow for the first month. What does this tell you about the viability of her business idea based *only* on this forecast? What further information would you need to assess the business's overall viability?
Calculation of Net Cash Flow:
Net Cash Flow = Total Cash In - Total Cash Out
Net Cash Flow = £4000 - (£1500 + £500 + £200) = £4000 - £2200 = £1800
Viability Assessment: The net cash flow of £1800 is positive. This suggests that Sarah's catering business idea has the potential to be viable in the short term, as it is expected to generate more cash than it spends in the first month.
Further Information Needed: To assess the business's overall viability, further information is needed, including:
- Detailed Cost Analysis: A more detailed breakdown of all costs, including potential unexpected expenses.
- Sales Forecast: A realistic sales forecast to assess the sustainability of cash inflows.
- Pricing Strategy: Information on the pricing strategy and its impact on profitability.
- Funding Sources: Details of how the business will be funded and the associated repayment terms.
- Market Analysis: An understanding of the target market and the level of demand for the catering services.