Cash Flow Forecast

12 Key excerpts on "Cash Flow Forecast"

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  Fundamentals of International Financial Accounting and Reporting

  • Roger Hussey(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  The Cash Flow Forecast is an essential document that allows companies to man-age their cash flows. Companies will also keep a Cash Flow Statement of what actually happens. By comparing the two statements as they progress through the financial period, the company can ascertain whether the strategies it adopts to prevent a cash deficit are working. These are not just cash strategies, but also impact on the Income Statement and the Balance Sheet. The predictions and control of cash flow have an important impact on operations. Reducing the cash flows going out may mean reducing the wages and salaries paid, relocating the business, spending less on training and advertising. To increase cash flows coming in could entail increasing the price of products or increasing the num-ber of products sold. The Cash Flow Forecast is not only used in continuing businesses, but is essen-tial if a business wishes to start a new venture or if individuals are contemplating starting a new business. The Cash Flow Forecast will allow them: • to see if the proposed business will generate sufficient cash; • to decide on the timing of cash inflows and outflows — as a general rule in a business, you want the cash to come in as quickly as possible, but go out as slowly as possible. A business with a shortage of cash may attempt to achieve this by collecting the money it is owed as soon as it can, but delay any payments it has to make; The Basics of the Statement of Cash Flows 121 • to calculate the amount of capital (cash) they need to start the business; • to ascertain what additional funds they require — the owners of a new business may be able to provide some cash of their own, but a Cash Flow Forecast will show if they will need to obtain a loan from outside sources such as a bank. Case study — Jim Sparks Jim Sparks plans to start a business on 1 January manufacturing and selling tennis racquets.

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  The Economist Guide to Cash Management

  How to avoid a business credit crunch

  • John Tennent(Author)
  • 2012(Publication Date)
  • Economist Books

    (Publisher)

  Cash Flow Forecasting

  A BUSINESS HAS A RESPONSIBILITY to make payments when they are due regardless of whether sufficient cash has been collected from customers to provide the means of payment. Unpaid suppliers may be begrudgingly tolerant and wait a little longer for their cash, but they may refuse to fulfil further orders until payment is made and they may even take legal action to recover the debt.

  To enable management to plan appropriately and feel confident that payments can be made as they fall due, a detailed Cash Flow Forecast is required that predicts the timing and amounts of receipts and payments. The advance warning of any potential cash shortages that are revealed allows management the time to put together a considered, rather than reactive, plan for bridging any gaps in cash flow. It can take time to negotiate with banks and raise additional finance, and with a well-structured and realistic Cash Flow Forecast this can be done well in advance of any potential need.

  Furthermore, a well-constructed Cash Flow Forecast helps give banks and other providers of finance confidence in management realism and competence – and can encourage banks to lend at less onerous interest rates than they otherwise might.

  This chapter looks at the construction of the most important tool in managing cash and avoiding a cash crisis – a Cash Flow Forecast. It explains how this links to the business plan and how to manage anticipated cash surpluses or deficits.

  Cash Flow Forecasting

  The essence of constructing a Cash Flow Forecast is to take the current cash balance and predict the likely receipts and payments that will arise within a set of time intervals. The quality of the predictions determines the quality of the Cash Flow Forecast and its usefulness. What the Cash Flow Forecast is to be used for – funding, operational or strategic purposes – will determine the time period and time intervals:

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  The Economist Guide to Financial Management 3rd Edition

  Understand and improve the bottom line

  • John Tennent(Author)
  • 2018(Publication Date)
  • Economist Books

    (Publisher)

  13

  Cash Flow Forecasting

  A BUSINESS HAS A RESPONSIBILITY to make payments when they are due regardless of whether sufficient cash has been collected from customers to provide the means of payment. Unpaid suppliers may be begrudgingly tolerant and wait a little longer for their cash, but they may refuse to fulfil further orders until payment is made and they may even take legal action to recover the debt.

  To enable management to plan appropriately and feel confident that payments can be made as they fall due, a detailed Cash Flow Forecast is required that predicts the timing and amounts of receipts and payments. The advance warning of any potential cash shortages that are revealed allows management the time to put together a considered, rather than reactive, plan for bridging any gaps in cash flow. It can take time to negotiate with banks and raise additional finance, and with a well-structured and realistic Cash Flow Forecast this can be done well in advance of any potential need.

  Furthermore, a well-constructed Cash Flow Forecast helps give banks and other providers of finance confidence in management realism and competence – and can encourage banks to lend at less onerous interest rates than they otherwise might.

  This chapter looks at the construction of the most important tool in managing cash and avoiding a cash crisis – a Cash Flow Forecast. It explains how this links to the business plan – for how to manage anticipated cash surpluses or deficits, see Chapter 7 .

  Cash Flow Forecasting

  The essence of constructing a Cash Flow Forecast is to take the current cash balance and predict the likely receipts and payments that will arise within a set of time intervals. The quality of the predictions determines the quality of the Cash Flow Forecast and its usefulness. What the Cash Flow Forecast is to be used for – funding, operational or strategic purposes – will determine the time period and time intervals:

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  Financial Management in Construction Contracting

  • Andrew Ross, Peter Williams(Authors)
  • 2012(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  As well as the formal record included with the profit and loss statement and balance sheet, a company should provide a cash flow budget or forecast. This can be defined as an estimate of the timing and amounts of cash inflows and outflows over a specific period (usually one year). A Cash Flow Forecast shows if a firm needs to borrow, how much, when, and how it will repay the loan. It provides vital information on the efficiency of the firm and also allows the firm time to plan if it requires to source finance.

  Cash inflows are the receipt of cash into a business. They would include payment for work complete, interim payments for continuing work, payment for materials on site and payment from other organisations for services offered.

  The cash outflows are the transfer of cash from the business to creditor organisations. This would include payment for materials, subcontract payments, staff salaries, repayment of loans as well as purchase of capital equipment.

  The net monthly cash flow is simply the balance of a month’s total cash inflows in relation to the months total cash outflows. Businesses need to forecast the cash flow on a monthly basis to allow them to predict their finance requirements and to estimate whether they have the capacity to undertake additional work in the future.

  11.3.3 Client and contractor

  A construction project client does not use a cash flow projection in the same way as a contractor, as generally the funding has been secured prior to the project commencing and the client ‘draws down’ from the fund to pay interim valuations. The client therefore only requires an estimate of the monthly amounts that will need to be paid. These amounts will often include costs for site acquisition, planning and design team fees, which will be incurred well before the construction project commences. A client’s quantity surveyor (QS) can use fairly unsophisticated techniques to model the cash requirements of the client.

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  Managing Cash Flow

  An Operational Focus

  • Rob Reider, Peter B. Heyler(Authors)
  • 2003(Publication Date)
  • Wiley

    (Publisher)

  264 Planning Cash Flow Cash flow planning focuses on having future expected sources exceed uses of cash and what needs to be done to maintain that positive flow of cash. Comparing actual results to the cash plan provides a basis for analysis and appro- priate decision making. The tools to be considered in the cash flow planning process include: • Preparation • Cash forecasting • Cash planning • Cash budgeting Preparation In order to establish an effective (i.e., usable and reasonably accurate) process for projecting cash flow, it is helpful to examine the company’s actual cash flow his- tory. A tedious, but systematic, method is to review in detail 12 months of actual cash flow for the company. For each month all sources of cash receipts and all cash disbursements should be listed by account. This will generate a growing list of receipts and disbursements, some of which will be quite small. But it will be eas- ier to combine items at the end of the process than to have to open a line item into greater detail after all data have been accumulated. The actual cash flow should be reconciled to the cash balance at the end of each month to ensure that all receipts and disbursements have been recorded. After 12 months of data have been accumulated, the categories can be cross-foot- ed to get totals for each line item. At this time the smaller items can be combined into one or more “other” categories while the larger items ensure that all major classifications of receipts and disbursements have been identified. There is now a basis for establishing a cash flow projection with appropriate detail line items. Cash Forecasting In addition to having the necessary internal systems in place to manage and con- trol its cash balances and transactions, the company must also know in advance what kinds of cash flows to expect. In that way, the company can deal with those cash flows on a prospective rather than totally reactive basis.

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  Managing Liquidity

  • Lance Moir(Author)
  • 1997(Publication Date)
  • Woodhead Publishing

    (Publisher)

  This will need to be accurate. Its principal use is to calculate the borrowing or depositing need for that day. For businesses that are trading at the limit of their facilities, it will also be used to see who can be paid! Indeed, businesses that get into financial difficulty often have failed to maintain reliable cash forecasting - because they were too busy selling or manufacturing. 2 T h e very short term forecast, which looks at likely cash flow over the next few days; this includes cheques drawn and about to be received through the banking system, as well as cash receipts and other known payments. This also ought to be fairly accurate. 3 T h e short to m e d i u m term forecast, looking about 6 months forward. This gives the general shape of the cash flow and allows various alternative funding and investment decisions to be made. 4 T h e long term forecast, looking at perhaps 4 or 5 years (or even longer in major capital-intensive industries). This is, in effect, the cash element of the corporate plan and will form the basis of the funding strategy. T h e s h o r t e r h o r i z o n forecasts (i.e. u p to t h e n e x t few d a y s / weeks) will b e b a s e d o n ' c l e a r e d funds 5 , t h a t is those t h a t a r e available for use a n d for interest p u r p o s e s . L o n g e r t e r m fore-casts c a n w o r k off b r o a d e r forecasts associated w i t h sales a n d profits. T h e w a y t h a t cash forecasts a r e d e s i g n e d will d e p e n d o n t h e structure of t h e c o m p a n y a n d t h e n a t u r e of its business. H o w -ever, a n y cash forecast will b e p r e p a r e d in o r d e r to s h o w t h e following: • the a m o u n t of cash surplus or requirement; • when the cash surplus or requirement will arise; • how long the cash surplus or requirement will last; • how the cash will eventually be used or generated; • in what currency the cash will be available or needed. 1 2

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  Managing Corporate Liquidity

  • Lance Moir(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Note that there is a deliberate split between short term and long term items. The purpose of this is to identify how much cash the business is generating or consuming from day-to-day activities. Many external lenders and investors in group situations will expect the trading cash flow to be able to fund new capital expenditure and dividend payments. If the trading cash flow is negative then this may point to an unsustainable business or one which is consuming too much cash in working capital (alternatively, this may be part of a deliberate business strategy for a growing business). This format will allow the treasurer to make pertinent comments to his or her colleagues about the cash flow of the business.

  As with the receipts and payments method, the basic forecast can be prepared at business-unit level, therefore it may be useful to introduce lines for inter-company payments.

  Different businesses will have different concepts of profit. It will be useful to try to express the true underlying level of profit by excluding non-recurring items such as profit on property sales and extraordinary and exceptional items. These frequently include non-cash elements which obviously do not form part of a cash forecast. For cash elements, it is better to show these separately in the bottom half of the forecast.

  When calculating the movements in the components of working capital, careful separation of any unusual elements such as a debtor due an uncompleted property sale will allow a better understanding of what is actually going on as well as helping to calculate the business cash flow.

  For all other elements, the need is to concentrate on the cash which is actually going to flow in the period under consideration. Virtually all of these items should be generated by a normal management accounts package.

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  CFIN

  • Scott Besley, Eugene Brigham, Scott Besley(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Many variables are in- volved in cash flow estimation, and many individuals and departments participate in the process. For example, the forecasts of unit sales and sales prices normally are made by the marketing group based on its knowledge of advertising effects, the state of the economy, competi- tors’ reactions, and trends in consumers’ tastes. Similarly, the capital outlays associated with a new product gen- erally are determined by the engineering and product- development staffs, while operating costs are estimated by cost accountants, production experts, personnel spe- cialists, purchasing agents, and so forth. As difficult as plant and equipment costs are to estimate, sales revenues and operating costs over the life of the project generally are even more uncertain. The financial staff’s role in the forecasting pro- cess includes (1) coordinating the efforts of the other departments, such as engineering and marketing; (2) ensuring everyone involved with the forecast uses a consistent set of economic assumptions; and (3) making sure that no biases are inherent in the forecasts. This last point is extremely important be- cause division managers often become emotionally involved with pet projects or develop empire-building complexes (egos), both of which can lead to Cash Flow Forecasting biases that make bad projects look good on paper, or vice versa. Although substantial difficulties can be encoun- tered when forecasting cash flows for capital budgeting projects, it is all but impossible to overstate the impor- tance of these forecasts. If cash flows fail to meet the forecasted levels, the company might lose hundreds of The basic principles of capital budgeting and the methods used to evaluate capital budgeting projects were covered in Chapter 9. In this chapter, we examine some additional issues, including cash flow estimation and incorporating risk into capital budgeting decisions.

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  Computing Risk for Oil Prospects: Principles and Programs

  • J.W. Harbaugh, J.C. Davis, J. Wendebourg(Authors)
  • 1995(Publication Date)
  • Pergamon

    (Publisher)

  Although cash flow analysis may seem complex, most people have a basic grasp of its principles even if they have never formally studied finance. Consider an ordinary bank checking account; the money in the account at any given moment is the net (or algebraic sum) of all cash infiows and all cash outflows since the account was established. The inflows are the deposits and interest earned; the outflows are the checks written on the account, the cash withdrawals, and any bank charges. If we tabulate all the inflows and outflows from the beginning of the account until the present, we would have a complete cash flow summary for the account. A cash flow analysis for a prospect diff'ers from our analogy only be-cause it considers possible inflows and outflows that may occur in the future, rather than the historical records of past events. Because they are projec-tions, these future transactions are uncertain. We don't know what the price of oil will be in the future, although we can make projections that may be reasonable. Likewise, we may be uncertain about the rate of tax-ation on oil production in the future, particularly in light of lawmakers' perennial desire to change the tax laws. We must make assumptions about these costs in spite of their uncertainties in order to compute a cash flow for a prospect, even though changes in prices and costs could have a major influence on the projected cash flows. Megill (1988) provides an excellent introduction to cash flow analysis in an oil-exploration context. There is a another major difference between the cash flow history of a checking account and a Cash Flow Forecast for an oil prospect. We must dis-count all future cash flows if we want to analyze their effect on the present 218 Forecasting Cash Flow for a Prospect value of the prospect. Suppose we are faced with making a decision at the present time and wish to compare alternative exploration investments.

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  Basic Management Accounting for the Hospitality Industry

  • Michael Chibili(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  The cash flow statement (also called the statement of cash flow) 5.1 Cash in the business 5.2 Establishing cash flow statements 5.3 A worked example in the establishment of the SCF using the indirect method Companies can only survive if they have enough cash in hand to be able to take care of all their expenses. Cash is considered as the lifeblood of any business. Users of financial statements who assess only the statement of profit and loss to try and determine the financial health of the company might later on realize that their assessment may have been incorrect. Profitable companies have been known to have suddenly failed because they did not adequately manage their cash flows. An understanding of the importance and management of cash is a must if any company’s management would want to avoid sudden liquidity problems. Section 5.1 discusses the place of cash in a business, while at the same time differentiating profits from cash. Section 5.2 provides the rules in the establishment of the cash flow statement, while Section 5.3 is a worked example of the cash flow statement using one of the well established methods. 81 5 © Noordhoff Uitgevers bv 5.1 Cash in the business Cash is money, in the form of notes and coins, which constitutes payment for goods or services at the time of their purchase or consumption. Cash is not only cash in hand but also deposits and overdrafts which are commonly called cash equivalents. All transactions whether they are settled immediately or settled in the future are ultimately conducted by cash or cash equivalents. Just like all other assets, cash is an asset with the same properties like other assets, and also many more.

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  Cash Flow Analysis and Forecasting

  The Definitive Guide to Understanding and Using Published Cash Flow Data

  • Timothy Jury(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  plausible. Forecasts are not right or wrong as such, because they are not based on scientific fact, they are simply plausible. In other words, they represent what we think is more or most likely to happen in the future, rather than some other less likely scenario. A single forecast is subject to the laws of probability, it represents one probable future. There are always other parallel probable futures.

  So, taken even more literally, plausible means we like this forecast more than any other forecast. This, then, is a subjective judgment; it is more plausible to us. In other words prejudice and opinion are also a factor to consider in the process of preparing and using forecasts.

  The term future scenarios is more self-explanatory. Let me repeat this because it is so important: forecasts are not right or wrong as such. In order to create a forecast it is necessary to make certain assumptions about the future. The forecast itself, which consists of apparently factual numbers with the same authority as any other accounting information, is actually nothing more than a scenario based on the particular set of assumptions used to make it. It is neither right nor wrong. It follows from this that much of the difficulty in forecasting arises from the assumptions we make and the way we use them in our forecast model. A forecast does not represent fact (what will happen), it represents what might happen, given a particular set of circumstances (the assumptions).

  REASONS FOR PREPARING Cash Flow ForecastS Why do we prepare Cash Flow Forecasts? The usual reason for doing this is to assist with some sort of decision making in the present. The preparation of a Cash Flow Forecast starts with its purpose. What is the forecast for? Typical reasons for preparing forecasts of a businesses cash flow are:

  • Do we have enough cash to run our business next month, quarter, year?
  • Do we have enough cash to buy, invest in X?
  • When do we think we will we get paid by our customers?
  • Can we afford to pay for asset X?
  • How do we pay for asset X?
  • How much should we invest in project X?
  • How much do we think business X is worth?

  In order to assist us in making these decisions it may be helpful to create one or more forecasts of the expected cash inflows and outflows relevant to the decision. In other words, the purpose of the forecast should dictate the scope

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  Basic Management Accounting for the Hospitality Industry

  • Michael Chibili(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  5

  The cash flow statement (also called the statement of cash flow)

  5.1    Cash in the business

  5.2    Establishing cash flow statements

  5.3    A worked example in the establishment of the SCF using the indirect method

  Companies can only survive if they have enough cash in hand to be able to take care of all their expenses. Cash is considered as the lifeblood of any business. Users of financial statements who assess only the statement of profit and loss to try and determine the financial health of the company might later on realize that their assessment may have been incorrect. Profitable companies have been known to have suddenly failed because they did not adequately manage their cash flows. An understanding of the importance and management of cash is a must if any company’s management would want to avoid sudden liquidity problems. Section 5.1 discusses the place of cash in a business, while at the same time differentiating profits from cash. Section 5.2 provides the rules in the establishment of the cash flow statement, while Section 5.3 is a worked example of the cash flow statement using one of the well established methods.

  5.1    Cash in the business

  Cash is money, in the form of notes and coins, which constitutes payment for goods or services at the time of their purchase or consumption. Cash is not only cash in hand but also deposits and overdrafts which are commonly called cash equivalents. All transactions whether they are settled immediately or settled in the future are ultimately conducted by cash or cash equivalents. Just like all other assets, cash is an asset with the same properties like other assets, and also many more. The structure of the subsections is as follows:

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