Cash Flow Forecasts

Construction Steps

• Step 1: Calculate Total Inflows: Sum all expected receipts for the month. Use the acronym SLIC (Sales, Loans, Interest, Capital) to ensure no inflows are missed.
• Step 2: Calculate Total Outflows: Sum all expected payments. Use the acronym SWURRS (Stock, Wages, Utilities, Rent, Repayments, Salaries) as a checklist.
• Step 3: Calculate Net Cash Flow: Determine the difference between inflows and outflows for that specific month.

Net Cash Flow Formula: $\text{Net Cash Flow} = \text{Total Inflows} - \text{Total Outflows}$

• Step 4: Determine Balances: Combine the current month's net flow with the cash existing at the start of the month to find the end-of-month position.

Balance Calculation

• Opening Balance: The amount of cash available at the very start of the month. This is always equal to the Closing Balance of the previous month.
• Closing Balance: The final cash position at the end of the month, calculated by adding the Net Cash Flow to the Opening Balance.

Closing Balance Formula: $\text{Closing Balance} = \text{Net Cash Flow} + \text{Opening Balance}$

Understanding the difference between cash and profit is vital for accurate financial analysis.

• Cash vs. Working Capital: While cash is the physical money in the bank, working capital includes other short-term assets like inventory and amounts owed by customers. A business might have high working capital but low cash if it cannot sell its inventory quickly.

• Reduce Credit Periods: By asking customers to pay sooner, the business accelerates its inflows, though it risks losing customers to competitors with better terms.

• Extended Repayment: Negotiating with suppliers to pay later preserves cash in the short term, but may damage supplier relationships or result in late fees.

• Asset Management: Techniques like sale and leaseback allow a business to unlock the value of fixed assets (like machinery) to gain immediate cash while retaining use of the equipment.

• Inventory Control: Selling off excess or slow-moving stock (even at a discount) converts idle assets into liquid cash and reduces storage costs.

• The Bridge Rule: In a multi-month table, always verify that the Closing Balance of month $n$ is identical to the Opening Balance of month $n+1$. This is the most common place for marks to be lost.

• Negative Numbers: Use brackets, e.g., $(250)$, to denote negative values in cash flow tables. This is the professional standard and prevents confusion with operation symbols.

• Source of Error: If a forecast looks wrong, check the Net Cash Flow first. Ensure you haven't accidentally added an outflow or subtracted an inflow.

• Reasonableness Check: If a small corner shop shows a closing balance of $1,000,000$, re-examine your addition; financial values should align with the scale of the business described.