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  2.  
  3. PEARSON (PEARSON)
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  5. Business
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  7. Unit 2 - Managing business activities

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Summary Planning Cash Flow
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Describes what cash flow and cash flow forecasting is, how to calculate cash flow, the advantages and disadvantages of cash flow and why newly established businesses are vulnerable to cash flow problems

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  • September 27, 2020
  • 2
  • 2019/2020
  • Summary

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Theme 2 Topic 8
Planning Cash-Flow
What is Cash Flow?
Cash Flow – the movement of cash into and out of the business over a period of time

Cash Flow Forecast – estimates of a firm’s expected cash inflows and outflows over a period of time

A Typical Format for a Cash Flow Forecast:

January February March
CASH INFLOW:
Cash Sales
Trade Credit Sales
Total Inflow

CASH OUTFLOW:
Wages
Other Costs
Total Outflow

Net Monthly Cash Flow
Opening Balance
Closing Balance

Net Cash Flow = Total Cash Inflow – Total Cash Outflow

Opening Balance = Closing Balance (previous month)

Closing Balance = Opening Balance + Net Monthly Cash Flow

Trade Credit – a period of time given by suppliers before customers have to pay for goods or services

Important!

 Cash flow forecasts record the cash at the exact time it is estimated to enter or leave the business
bank account or till
 If a number is in brackets it means it is a negative
 A cash flow forecast tells us nothing about profit – a profitable business can have poor cash flow and
still go out of business

Advantages of a Cash Flow Forecast

 Helps avoid unexpected cash flow problems – can plan ahead and act on it
 Supports loan applications – gives the bank more confidence that the entrepreneurs will be able to
make the repayments of the loan

Disadvantages of a Cash Flow Forecast

 It is only an estimate – sales may be lower than forecasted or costs may be higher
 The longer the period of time the cash flow has been calculated for, the less likely it is to be accurate
 Once a cash flow forecast has been prepared, it needs to be monitored regularly and updated
 In dynamic markets cash flow may be of limited use

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