THE CASH
FLOW
PROJECTION
SUBTITLE COMES HERE
OBJECTIVES OF THIS LESSON
Students Will:
Students will:
Define/explain cash flow budgets
*prepare cash flow projections within a six-month period;
Preparation of simple cash flow projection and outflow.
Inflows:
sales, owners’ equity, cash, grants, surplus cash/profit (by month
four or five).
Outflows:
overhead expenses – utilities, wages and salaries, transportation (and
other expenses that the business may incur).
2
Budgeting in Business
• Budgets: A budget is a financial plan for the future. (A cash
flow projection can also be called a cash flow budget)
• It shows how a particular resource will be used over a future
period of time.
• E.G. A cash budget will show how cash will be used over a period
of time in the future.
• Businesses prepare budgets in order to plan for the uses of their
various resources;
–
–
–
–
•
cash,
stock,
Sales
Production
Businesses budgets are used to plan their activities.
Cash Flow Projection/ Budget:
Definition: A Cash Budget is a statement of projected cash inflows and outflows
(anticipated income and expenditure) and the time when it is likely to take place, for a
particular business over a specified period of time.
Such budgets are often used by businesses as a type of forecast, that is they are used to
attempt to predict what might happen to the business’ cash position in the future.
Trying to forecast future events by using previous experiences and data will help the
business plan for the future,
One of the most important forecasts that a business can make is trying to predict the
amount of money that it expects to have flowing through the business:
 income / cash inflows
 expenditure/ cash outflows
A CashofFlow
Flow Projection is therefore a planning tool or
Uses
CashBudget/Cash
Flow Forecasts:
instrumentuse
forCash
a business.
Managers
Forecasts to help find out the future cash flow position of their
businesses.
They can be used in the following situations:
Starting up a business
Keeping lenders/bank manager informed
Running an existing business
Managing cash flow.
Starting up a business:
When beginning a business the owner will need to estimate how much cash is needed
for the first few months of operations.
This can be an expensive time as:
Fixed assets have to be bought
Stocks have to be bought
Advertising & promotion costs have to be paid
5
New businesses often fail because of shortage of cash
A cash flow forecast can help to avoid these problems.
Keeping lenders informed:
Lenders who provide loans to businesses usually want to see the business’ cash flow
forecast before lending any money.
The cash flow forecast will show:
How big a loan /overdraft is needed.
When the money will be needed
Whether the business is making enough money to repay the loan
When the loan will be repaid
Running an existing business:
Any business can run out of cash or need more cash than it has at any time.
Borrowing needs to be planned in advance. Doing this :
Avoids high interest rates
 Avoids refusal by the bank.
Makes planning easier
Avoids the business exceeding its overdraft limit
A cash flow forecast will assist in this respect.
Managing Cash Flow:
Businesses usually try to avoid having too much cash build up in their bank accounts.
t is felt that such cash could be better used to:
 pay off loans and reduce interest charges
Pay off creditors and take advantage of discounts.
A cash flow forecast will show times when there is a build up of cash in the bank
account.
The Purpose of Budgets
•
Budgets serve many different purposes. These are as follows:
To provide all managers with financial responsibility.
To control an organization and its activities as it works towards achieving its
objectives.
To map a way forward showing the steps to be taken.
To co-ordinate the various activities of an organization.
To instruct managers on how to manage their part of the organization.
To provide a benchmark against which performance can be measured.
To motivate members of the organization.
To aid in decision making
The Relationship between Budgeting
and Forecasting
• A Cash flow budget/ cash flow forecast is therefore a
•
•
•
•
planning tool for a business
Budgeting is used for planning for future business
activities and resource use.
In order to plan the manager must have an idea of what
to expect in the future.
Forecasting deals with trying to predict what may happen
in the future and how such actions will affect the firm.
In order to plan therefore, the manager has to be able to
predict with a certain degree of accuracy.
Budgeting & Forecasting
• Budgeting and forecasting therefore go hand in hand. In
order to plan one has to predict.
• However a forecast does not tell a business how to react
to future events. The manager still has to decide how to
use resources to react to these events.
• The budgets are used to achieve this.
What is Meant by cash Flow
Definition: A cash flow projection can also be called a cash flow budget.
It is an estimation of the cash inflows and outflows for a business over a
specific period of time.
This budget is used to assess whether the business entity has sufficient
cash to operate.
 Companies use sales and production forecasts to create a cash budget,
along with assumptions about necessary spending and accounts receivable.
 If a company does not have enough liquidity to operate, it must raise more
capital by issuing stock or by taking on debt.
The inputs to the cash budget come from several other budgets..
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What is Meant by cash Flow
Repayment of loans
Payment of creditors/suppliers who provided goods on credit
The Cash Flow Cycle: The Cash Flow Cycle shows the stages between paying
out cash for labor, materials etc. and receiving cash from the sale of goods.
1: Cash needed
to pay for
2: Materials,
wages, rent
etc.
5: Cash payment
received for
goods sold
3: Goods
produced
4: Goods sold
Identifying Inflows & Outflows
Cash Inflows: These consists of cash expected to be collected by the business:
Cash sales
Receipts from customers/debtors
Loans received
New capital invested in the business
Money received from the sale of assets
Tax refunds
Any other sources of income
15
Identifying Inflows & Outflows
Cash Outflows: These consist of cash expected to be paid out by the business:
Expenses
Payments to suppliers/creditors for goods or services
Purchases of fixed/non-current assets
Repayment of loans
Cash drawings and dividends paid
Payment of taxes
Investment of surplus cash
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Any other cash payments
Case Study Task
Transaction
Cash inflow
Cash outflow
Purchase of a computer for cash
Sale of goods to customers– no credit given
Interest paid on bank loan
Wages paid to staff
Debtors pay their bills
Additional shares sold to shareholders
Creditors are paid
Bank overdraft is paid off
For each of the above transactions, place a tick in the correct column to indicate
whether it represents a cash inflow or outflow.
Preparing a Cash flow budget:
Step #1 initial forecast
Businesses need to forecast :
The business needs to prepare estimates
How much cash they estimate will be collected within the budgetary period.
(inflows)
How much cash they estimate will be spent during the budgetary period
(outflows)
They need to estimate what cash balance they need or want at the end of
each financial period.
These plans will depend on various factors:
The external environment in which the business operates
The economic climate ( whether there is a recession)
Changes in the market (maybe they are trying to increase their market
share)
 Changes in technology.
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Step #2
Policy decisions:
In light of the considerations at step one, decisions have to be made by
management on :
What products & services to offer
What level of sales promotion may be needed.
This may involve evaluating proposals submitted by various departments and
selecting from the alternatives those which best fit the objectives of the
company.
Those selected are usually those which show the best potential for advancing
the objectives in the light of the resources available.
These decisions must be in step with the company’s policies
19
Steps in preparing the cash flow projection.
(1) Get the opening bank/cash balance
(2) Enter all money receipts/inflows for the period/month
(3) Total the receipts
(4) Enter all the money payments/outflows for the month
(5) Total the outflows/payments.
(6) Deduct the total payments/ outflows from the total of the inflows/receipts.
(7)This amount is called the Net Cash Flow and can be negative or positive.
Add the net cash flow to the opening bank balance
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Steps in preparing the cash flow projection.
(7) Carry this total forward as the opening balance for the next month/period.
(8) Note non-cash items like depreciation and bad debts are NEVER entered in
the cash flow forecast.
21
Example of preparing a cash flow budget:
ABC Ltd. presents the following data:
Bank balance on July 01 2015: $30 000.00
Projected Cash inflows/Collections:
July: Cash sales;$ 9 000; Receipts from debtors: 1 800.
August: Cash sales; $9 900; Receipts from debtors; $2 160.
Projected cash outflows/ payments:
 Rent for six months payable in July $6 000; Fixtures to be bought in July;
$2 700; Wages $1 560/month; Drawings $560 per month;
General expenses: July $230; August $480;
Required: a Cash Flow budget for the two months July and August 2015.
22
Balance brought
forward
Income/Inflows
Total Inflows
Outflows
Total Outflows
Net Cash Flow
Balance carried
forward
 Assignment #1: John, a businessman estimates that he will have the following receipts and payments for
January and February 2015:
 Expected collections from operations:
January
February
Cash Sales
345 000
309 000
Debtors
80 000
115 000
 Expected payments for operations:
January
February
Wages
111 000
126 000
Stock
70 000
74 000
 The cash balance at the beginning of January is $50 000
 Prepare
24 a cashflow budget for the months of January and February.
The consequences of poor cash flow.
A cash flow projection can help a business to identify potential problems in
advance.
 In particular, months in which there may be shortfalls of cash.
Once these are recognized then the business can take appropriate action.
Without such a document the business is operating blind, this can be a cause
for failure.
If however the forecast is prepared wrong or is not being properly monitored
this too can lead to difficulties like a shortage of working capital.
This may make it difficult for the business to meet expenses.
This can quickly lead to insolvency and even bankruptcy.
25
Measures to correct a shortage of working capital situation include:
Seeking a bank overdraft
Reducing costs/expenses
Controlling stock levels
Monitoring payments received from debtors
Monitoring payments made to suppliers
Interpreting Cash flow forecasts:
Cash flow is more about liquidity rather than profitability.
Although closely related, cash flow and profitability are different.
A cash flow statement lists cash inflows and cash outflows while the income
statement lists income and expenses.
A cash flow statement shows liquidity while an income statement
shows profitability.
27
A business can use a Cash flow Projection to plan for any cash shortages or surpluses
during a given period.
Cash budgets are important guidelines that assist managers in anticipating borrowing,
debt repayment, operating expenses, and short-term investments.
 Using the Cash Flow projection as a management tool:
A monthly statement of cash flows is an essential analysis tool.
Analysis involves looking for trends and patterns and using this information to prepare
meaningful budgets and forecasts as well as make important business decisions.
 A cash flow projection shows where cash inflows come from and what cash outflows are
spent on.
 Analysis can help determine, for example, whether the business is generating enough
cash from sales revenues;
 or whether it needs to consider other sources of funding, such as a short-term loan
during a seasonal sales decline.
Interpreting Cash flow forecasts:
Inflows
Sept.
Balance b/d
Oct.
Nov.
Dec
0000
(150)
0000
(25)
Sales
1 050
1 450
1 250
1 500
Total Inflows
1 050
1 450
1 250
1 500
Purchases
450
500
500
550
Wages
500
500
500
500
Running costs
250
300
275
300
Total Outflows
1 200
1 300
1 275
1 350
Net cash flow
(150)
150
(25)
150
Balance c/f
(150)
0000
(25)
125
Outflows
30
Interpreting Cash flow forecasts:
From the above cash flow forecast:
Which month shows that the business would be only just able to meet its costs?
What pattern have you observed in the business’ sales?
What have you observed about the business’ Running costs?
Is the business’ cash position improving or getting worse?
How can you tell?
What advice can you give to the business? (justify your advice)
31
 Using the Cash Flow projection as a management tool:
A review of cash inflows and out flows can indicate falling cash receipts and increasing
outflows in certain areas.
It can be a major indicator of whether the business has a good cash management plan.
Frequent borrowing and injections of outside capital can indicate the business is
financially unstable.
A Cash Flow Forecast
Receipts
Jan.
Sales
2 500
Debtors
000
Other
1 600
Total (A)
4 100
Payments
Purchases
800
Creditors
400
Wages
1 600
Rent/rates
1 500
Light/heat
1 000
Total (B)
5 300
Net flow(A-B)-1 200
Bal B/F
1 500
Bal C/F
300
Feb.
Mar.
Apr.
8 000
12 000 17 000
500
800 1 200
1 600
1 600
1 600
10 100 14 400 19 800
1 000
2 500
1 600
1 500
1 000
7 600
2 500
300
2 800
1 200
500
1 600
1 500
1 000
5 800
8 600
2 800
11 400
1 500
600
1 600
1 500
1 000
6 200
13 600
11 400
25 000
Cash flow forecast for FG Promotions
Details
January
February
March
April
Opening bank balance
3 000
5 000
7 000
4 000
Cash sales
15 000
15 000
20 000
25 000
Receipts from debtors
5 000
5 000
7 000
8 000
Total cash inflows
20 000
20 000
27 000
33 000
Materials and wages
3 000
3 000
5 000
7 000
Rent & other expenses
15 000
15 000
25 000
15 000
Total cash outflows
18 000
18 000
30 000
Z
Net Cash flow
2 000
X
(3 000)
11 000
Closing bank balance
5 000
7 000
Y
15 000
Cash inflows
Cash Outflows
 Calculate values for X, Y & Z
 Suggest one reason for the higher Rent & other expenses figure in March than in the other months.
Solving Cash Flow Problems
• Arranging for loans & overdrafts.
• Selling of fixed assets which are not needed
• Urging debtors to pay quickly by offering discounts.
• Requesting longer payment or credit periods from
suppliers.
• Better management & control of finances.
• Timing of payments to time of receipts.
Solving cash flow problems
• A cash flow problem exists when a business runs short of
cash because its money is tied up in stocks & other assets.
• As a result of this the business does not have enough
liquidity to continue operating & pay its debts when they
fall due.
• When cash flow problems arise the business needs to try
to solve them quickly.
• Solutions may involve the following:
Solving cash flow problems
• Asking for cash sales
• Reduce prices to increase sales
• Reduce expenditure, find cheaper suppliers, reduce the level
of stocks being held
• Owners should take less drawings.
• The general idea is to increase the amount of money
flowing into the business or available to it at the
time.
Net cash flow = total cash inflow
– total cash outflow
Shows forecasted
cash inflows &
cash outflows
Helps managers plan
ahead
CASH FLOW
New businesses will
need to have one to
get bank loan
Loans can be
arranged in a
negative cash flow is
forecast
Cash is received from customers
but also from bank loans & sale of
assets & shares
Cash is the most
liquid asset
Cash is needed to
pay expenses
CASH FLOW
Lack of cash can
cause a liquidity
problem
Cash flow is not
the same as profit
Cash flow problems can occur
from overtrading or giving too
much credit
Cash Budgeting
Cash budgeting is a process of predicting cash inflows and allocating cash outflows for a
specific time period.
For this reason, cash budgeting relies heavily on accurate cash flow forecasts.
 It also requires effectively managing activities such as customer billing and collections,
short-term investing and payments to creditors.
The goal is to strike a cash reserve balance that is neither too much nor too little but
which still allows the business to pay its daily operating expenses.
Strategies for achieving this goal include:
 Accelerating cash inflows and delaying cash payments until they come due,
Investing excess cash reserves to earn an acceptable rate of return and;
When necessary, borrowing cash at good credit term
Causes of Insolvency:
Allowing customers too long a credit period; maybe to encourage sales
Purchasing too many fixed assets at once.
Purchasing or producing too high a level of stock when expanding too quickly.
 ( Cash has to be used to pay for this stock)
This is often called: Overtrading
Which of the following is NOT considered to be an outflow?
(A)Rent
(B) Sales
(C) Utilities
(D) Wages and salaries
(ii) How can a business make a profit and yet have a cash flow problem?
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THANK YOU
FLORA@CONTOSO.COM
HTTP://WWW.CONTOSO.COM/
Cash Flow is not Profitability
 People often mistakenly believe that a cash flow statement will show the profitability of a business or project.
Although closely related, cash flow and profitability are different.
 A cash flow statement lists cash inflows and cash outflows while the income statement lists income and
expenses. A cash flow statement shows liquidity while an income statement shows profitability.
 Many income items are also cash inflows. However, there are many cash items that are not income and
expense items, and vice versa.
 Also business may sell goods on credit an at a profit, but will only receive payment for them at a later date.
 This leads to the important question: Can a profitable business run out of cash? The answer is YES !!!
 This is a major reason for businesses failing, it is called INSOLVENCY.
The sales of crops and livestock are usually both income
and cash inflows. The timing is also usually the same as
long as a check is received and deposited in your account
at the time of the sale. Many expense items are also cash
outflow items. The purchase of livestock feed (cash
method of accounting) is both an expense and a cash
outflow item. The timing is also the same if a check is
written at the time of purchase.
 For example, the purchase of a tractor is a cash outflow
if you pay cash at the time of purchase as shown in the
example in Table 1. If money is borrowed for the
purchase using a term loan, the down payment is a
cash outflow at the time of purchase and the annual
principal and interest payments are cash outflows each
year as shown in Table 2.
 The tractor is a capital asset and has a life of more than one year. It is included as an expense item in an
income statement by the amount it declines in value due to wear and obsolescence. This is called
“depreciation”. The cost of depreciation is listed every year. In the tables below a $70,000 tractor is
depreciated over seven years at the rate of $10,000 per year.
Depreciation calculated for income tax purposes can be used. However, to more accurately calculate net
income, a realistic depreciation amount should be used to approximate the actual decline in the value of the
machine during the year.
In Table 2, where the purchase is financed, the amount of interest paid on the loan is included as an expense,
along with depreciation, because interest is the cost of borrowing money. However, principal payments are not
an expense but merely a cash transfer between you and your lender.
THANK YOU
FLORA@CONTOSO.COM
HTTP://WWW.CONTOSO.COM/
Cash Flow-based forecasts are estimates of the amount and timing of cash receipts and
payments, net cash flows and changes in cash balances split by considered periods up to a
year. It helps to manage daily cash flows. In fact, combining these dynamic account
transactions and static account balances a company can yield the amount of cash
remaining in bank accounts at the end of a period (Ray, 2010).
What is Meant by cash Flow
The cash flow budget is comprised of two main areas, which are:
 Sources of Cash and Uses of Cash.
The Sources of Cash/Cash Inflow section contains:
 the beginning cash balance
 cash receipts from cash sales,
 cash from accounts receivable collections/debtors,
Cash from the sale of assets.
Cash received from loans or borrowing of money
Owners/investors/shareholders putting more money into the
business.
52
What is Meant by cash Flow
The Uses of Cash section contains all planned cash expenditures,
which comes from:
 direct materials budget,/purchases of raw materials
direct labor budget,/payment of wages
manufacturing overhead budget,/Payment of rent etc
 selling and administrative expense budget./payment of business
expenses

items for fixed asset purchases
53
 dividends to shareholders
SECTION DIVIDER
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congue massa. Fusce posuere, magna sed pulvinar ultricies, purus lectus
malesuada libero, sit amet commodo magna eros quis urna.
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PRESENTATIO
N TITLE
SUBTITLE COMES HERE
CONTENT 01
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consectetuer adipiscing elit. Maecenas
porttitor congue massa. Fusce posuere,
magna sed pulvinar ultricies, purus
lectus malesuada libero, sit amet
commodo magna eros quis urna.
Nunc viverra imperdiet enim. Fusce
est. Vivamus a tellus.
Pellentesque habitant morbi tristique
senectus et netus et malesuada fames
ac turpis egestas. Proin pharetra
nonummy pede. Mauris et orci.
56
CONTENT 02
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consectetuer adipiscing elit. Maecenas
porttitor congue massa. Fusce posuere,
magna sed pulvinar ultricies, purus
lectus malesuada libero, sit amet
commodo magna eros quis urna.
Nunc viverra imperdiet enim. Fusce est.
Vivamus a tellus.
Pellentesque habitant morbi tristique
senectus et netus et malesuada fames
ac turpis egestas. Proin pharetra
nonummy pede. Mauris et orci.
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COMPARISON 01
TOPIC 01
TOPIC 02
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adipiscing elit. Maecenas porttitor congue
massa. Fusce posuere, magna sed pulvinar
ultricies, purus lectus malesuada libero, sit
amet commodo magna eros quis urna.
Lorem ipsum dolor sit amet, consectetuer
adipiscing elit. Maecenas porttitor congue
massa. Fusce posuere, magna sed pulvinar
ultricies, purus lectus malesuada libero, sit
amet commodo magna eros quis urna.
Lorem ipsum dolor sit amet, consectetuer
adipiscing elit. Maecenas porttitor congue
massa. Fusce posuere, magna sed pulvinar
ultricies, purus lectus malesuada libero, sit
amet commodo magna eros quis urna.
Lorem ipsum dolor sit amet, consectetuer
adipiscing elit. Maecenas porttitor congue
massa. Fusce posuere, magna sed pulvinar
ultricies, purus lectus malesuada libero, sit
amet commodo magna eros quis urna.
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COMPARISON 02
TOPIC 01 COMES HERE
Lorem ipsum dolor sit amet, consectetuer
adipiscing elit. Maecenas porttitor congue
massa. Fusce posuere, magna sed pulvinar
ultricies, purus lectus malesuada libero, sit
amet commodo magna eros quis urna.
Nunc viverra imperdiet enim. Fusce est.
Vivamus a tellus.
Pellentesque habitant morbi tristique
senectus et netus et males
Pellentesque habitant morbi tristique
senectus et netus et malesuada fames ac
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adipiscing elit. Maecenas porttitor congue
massa. Fusce posuere, magna sed pulvinar
ultricies, purus lectus malesuada libero, sit
amet commodo magna eros quis urna.
Nunc viverra imperdiet enim. Fusce est.
Vivamus a tellus.
Pellentesque habitant morbi tristique
senectus et netus et males
Pellentesque habitant morbi tristique
senectus et netus et malesuada fames ac
TOPIC 02 COMES HERE
59
Chart
Sales
Statistics here
6
5
4
3
2
1
0
Category 1
Category 2
Series 1
60
Category 3
Series 2
Series 3
Category 4
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
TEAM
ALEXANDER
MARTENSSON
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consectetuer adipiscing elit.
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massa. Fusce posuere,
magna sed pulvinar ultricies,
purus lectus malesuada
libero, sit amet commodo
magna eros quis urna.
VICTORIA LINDQVIST
MIRJAM NILSSON
ANGELICA ASTROM
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consectetuer adipiscing elit.
Maecenas porttitor congue
massa. Fusce posuere,
magna sed pulvinar ultricies,
purus lectus malesuada
libero, sit amet commodo
magna eros quis urna.
Lorem ipsum dolor sit amet,
consectetuer adipiscing elit.
Maecenas porttitor congue
massa. Fusce posuere,
magna sed pulvinar ultricies,
purus lectus malesuada
libero, sit amet commodo
magna eros quis urna.
Lorem ipsum dolor sit amet,
consectetuer adipiscing elit.
Maecenas porttitor congue
massa. Fusce posuere,
magna sed pulvinar ultricies,
purus lectus malesuada
libero, sit amet commodo
magna eros quis urna.
61
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The example shows that an inordinately large dividend payment in the second week of the cash budget,
coupled with a large asset purchase in the following week, places the company in a negative cash position.
Paying out such a large dividend can be a problem for lenders, who do not like to issue loans so that
companies can use the funds to pay their shareholders and thereby weaken their ability to pay back the loans.
Thus, it may be wiser for the company to consider a small dividend payment and avoid a negative cash
position.
Other Cash Budget Issues
Cash balances may fluctuate considerably within a single accounting period, thereby masking cash shortfalls
that can put a company in serious jeopardy. To spot these issues, it is quite common to create and maintain
cash forecasts on a weekly basis. Though these short-term budgets are reasonably accurate for perhaps a
month, the precision of forecasting declines rapidly thereafter, so many companies then switch to budgeting on
a monthly basis. In essence, a weekly cash budget begins to lose its relevance after one month, and is largely
inaccurate after two months.
Students Will:
Students will:
Define/explain cash flow budgets
*prepare cash flow projections within a six-month period;
Preparation of simple cash flow projection and outflow.
Inflows:
sales, owners’ equity, cash, grants, surplus cash/profit (by
month four or five).
Outflows:
OBJECTIVES
OF
THIS
LESSON
overhead expenses – utilities, wages and salaries, transportation
(and other expenses that the business may incur).
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 Fixed, Flexible & Functional Budgets:
budgets can be fixed or flexible.
A fixed budget is one that has been prepared for a certain level of activity
or volume of production.
E.G. If a business intends to produce 10 000 units of a particular item or
product.
In this case the budget would show the costs of producing those units.
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A flexible budget is one that has been prepared for a for a range of possible
levels of output or activity.
They are used when the possible level of production is not certain since the
production can be affected by different factors like the weather which can
make production levels uncertain.
It would therefore be difficult to estimate the level of production/activity
and the costs associated with it.