BASIC UNDERSTANDING CASH FLOW FORECASTS

Cash is a vital resource for the operation of any organisation.

It is possible to be making profits but run out of cash. If, for
instance, there is a delay in the payment of accounts by
debtors then the organisation may find it does not have
enough cash available to meet its obligations. This document
will show you how organisations can use a cash flow
forecast to model the probable future cash position of the
organisation.

Whilst a profit and loss account normally recognises income and

expenditure as they occur (i.e. when sales or purchases are
invoiced), a cash flow forecast records the actual payment of the
cash into or out of the organisation (i.e. when the organisation pays
money into and out of the bank).
An example of a simple cash flow forecast for a small shop is given
overleaf. Note that the main headings of ‘income’, ‘expenditure,
surplus/deficit’, ‘opening bank’, and ‘closing bank’ are applicable to
all cash flow forecasts.
Cash Flow Forecast
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Total

Income
Sales 9000 6000 4400 5000 10000 9000 6000 6000 8000 8000 7500 5000 83900
Other Income 250 100 150 500 250 125 125 300 200 125 130 125 2380

Total 9250 6100 4550 5500 10250 9125 6125 6300 8200 8125 7630 5125 86280

Expenditure
Salary, NI, PAYE 450 450 450 450 450 450 450 450 450 450 450 450 5400
Rent and Rates 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 12000
Stock 5000 2000 3000 3000 3000 3000 4000 4000 2500 5000 2500 4000 41000
Delivery Charges 50 50 50 50 50 50 50 50 50 50 50 50 600
Store Design 50 25 25 25 25 30 30 50 15 15 15 15 320
Advertising 500 500 1000
Insurance 750 750
Van Maintenance 300 300 460 1060
Print and Stationery 250 175 175 175 300 1075
Total 6550 4275 5325 4700 5275 4530 6005 5550 4015 6690 4475 5815 63205

Surplus/Deficit 2700 1825 -775 800 4975 4595 120 750 4185 1435 3155 -690 23075

Opening Bank 500 3200 5025 4250 5050 10025 14620 14740 15490 19675 21110 24265 23575

Closing Bank 3200 5025 4250 5050 10025 14620 14740 15490 19675 21110 24265 23575
When faced with preparing a cash flow, it may help to bear the
following points in mind:
 Any items that are not cash (for example, depreciation of fixed
assets or notional charges that do not result in cash inflows or
outflows) should be ignored.
 The organisation’s standard terms of payment should be taken
into account when profiling payment items. If invoices are
regularly paid within 30 days of receipt then an invoice
received and authorised in June, will not be paid until July.
Therefore no cash will flow out of the organisation until July at
the earliest.
 Taxes (e.g. VAT) can be an issue when preparing cash budgets.
In the UK and elsewhere in the EU, for example, many
organisations are able to offset the VAT paid on their inputs
against tax due on outputs. The reason this may become an
issue is that in normal budgeting (of income and expenditure)
the effect of taxes like VAT would usually be ignored. In cash
budgeting it is wise to take them into account, in order to
accurately model all cash flows.
 The forecast should be built in a structured and systematic
fashion, starting with estimates of income and expenditure and
making sure that these are accurate before starting to model
the cash flow.
 The running cash balance should always be calculated. This will
highlight what the best and worst positions are so that any
temporary shortfall can financed accordingly.
 Spreadsheet software (e.g. Microsoft Excel) can be used to
model the cash and undertake the calculations in a fairly
straightforward manner.
 Think about using a graph to display the information in the
spreadsheet as this may be easier to grasp and understand
than the numbers.
 The assumptions that are made should always be documented
when preparing a cash flow.
 Use totals in the spreadsheet and other observations to check
for errors.

A cash flow template in a spreadsheet format is given in ‘Preparing

a Cash Flow Forecast’.