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What does the cash flow forecast and actual cash flow document tell us?
Having completed the cash flow forecast, the business can see when there might be times when it might be in difficulties. It can then
try to make sure that it puts in place a strategy to help deal with the problem.
Cash flow problems can be overcome but the business does need to be prepared for different eventualities. Copyright: Daniel Wildman, from stock.xchng.
- Overdraft: Many businesses will negotiate an overdraft facility with their bank. This is an agreement that they can make payments even though they do not have the money in the bank at that time. The bank will charge a rate of interest for this service.
- For example, a business might negotiate an overdraft facility of £10,000. If its bank balance is +£100 but it needs to pay a supplier a cheque for £1000, it can do so and the bank will pay the supplier. The business will pay interest on the £900 it has gone overdrawn. An overdraft facility is useful in providing a short-term solution to a cash flow problem. It may be that the business is waiting for a payment to come in for a customer of £2,500, but it has to wait for another week before it arrives. When it does arrive, it will then have a positive bank balance of £1,600 (2,500 minus the overdraft of 900). This calculation does not include the interest payment, of course.
- Re-negotiate terms: A firm might contact the creditor and seek to arrange a change to the payment terms. It might agree that it will pay the debt within a certain amount of time especially if it knows it is expecting receipts from sales to come in at some point in the future.
- Review its pricing: If the cash flow forecast predicts problems then the firm might review its pricing. In the case of Fruit28, they might decide to reduce the price of some fruit but increase the price of others. Of course, if it increases its price, it risks demand falling and even if it reduces its price, it might not tempt more people to buy a sufficient amount of additional fruit to increase its revenue.
- Think about its costs: It might be possible for a firm to review its costs if the forecast suggests problems. It can identify where its costs are causing it problems and try to find a way of reducing its costs. For example, Fruit28 might look at ways it can get its fruit delivered at a lower cost that the uncle is currently charging.
If the problem is more long term, the business might have to take more drastic measures. It might, for example, try and get a loan from the bank to help it pay its debts. If it does this it must recognise that it will be adding to its costs and its liabilities - it will be charged interest and will have to repay the loan.
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