Cash Flow Forecasts

Many businesses will be expected to prepare a cash flow forecast as part of their business planning. This means trying to plan out when costs will arise over the next year and also what they think their revenue is going to be.

For a new firm, they might do this based on the market research they have conducted prior to starting in business. For an established firm, they might base their forecast revenue on what has happened to them in previous years.

Receipts: This will be an estimate of the predicted sales revenue for each month. This is found by multiplying the amount the firm thinks it will sell by the price they charge.
Payments: This section will detail the payments that the firm expects to have to make during the year. This will be added together to give a 'Total Payments' box for each month.
Net Cash Flow: This will show the difference between the total payments and the receipts. For example, if in January a firm expects to receive £500 in revenue but will expect its total payments to be £650, it will have a net cash flow of -£150. This can either be put into the box as a minus number or is sometimes put in brackets (£150) to show that it is a negative figure.
Opening Balance: This shows the money that a firm has carried over from a previous month. For example, in the case above, the firm would have to show that it had a negative cash flow of -£150 carried over from January in the box for 'opening balance' for February.
Closing Balance: This is the difference between the net cash flow figure and the opening balance.

The best way to understand this is to have a go at doing a forecast for yourself. Use the following information to fill in the table.

Assume that Fruit28 estimates its costs, sales and prices for the year as follows:

In March, May and September the average sales of fruit are estimated as follows:

When completing your forecast, take into account the fact that during August the school is closed. Fruit28 does not receive any revenue in that month, but will still have to pay rent. Also assume that Fruit28 operates for 20 days every month. In addition, in April and December, they expect to receive half the normal expected monthly revenue because of school holidays (and therefore have half the variable costs) and receive nothing in August. We have given you an opening balance of +£80 to start you off.

Task 3

What is happening to the estimated cash flow during the year for Fruit28?
What do you think is the main cause of the changes in the cash flow during the year?
The person who does the delivery of the fruit asks for his payment at the end of each month. What difference would it make to Fruit28 if he insisted on being paid in advance?
In which month/s does Fruit28 face cash flow problems?
What do you think that Fruit28 might be able to do to deal with these problems?

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