Tuesday, 11 April 2017

The Cash-Flow Forecast

It is extremely important that cash receipts and payments are effectively planned and anticipated.

This has not been done in nearly all businesses that fail.

A good manager will plan that sufficient resources are available but that not too many resources are tied up.

This can be done in isolation but it is better done as part of the overall budgeting process.

Cash-Flow Forecast will yield many benefits

The preparation of a detailed Cash-Flow Forecast will yield many benefits.

Calculating and writing down the figures may suggest ideas as to how they can be improved.

For example,

  • the figures for cash payments from trade debtors will be based on the estimate of the average number of days' credit that will be taken.
  • This will pose the question of whether or not payments can be sped up.

Are the Cash-Flow Forecast results acceptable?

When the Cash-Flow Forecast is finished it will be necessary to consider if the results are acceptable.

  • Even if resources are available the results might not be satisfactory, and improvements will have to be worked out.
  • If sufficient resources are not available, either changes must be made or extra resources arranged.  Perhaps, an additional bank overdraft can be negotiated.

Either way, a well-planned document will help managers to take action in good time.

Best illustrated in a table format

The principles of a Cash-Flow Forecast are best illustrated with an example in a table format.

Variations in the layout are possible but a constant feature should be the running cash or overdraft balance.

Do not overlook contingencies and do not overlook the possibility of a peak figure within a period.

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