# Cash flow forecasts

#### Exam practice question 1

Explain two reasons why a new bakery business is likely to face liquidity problems in its first few months of operation.     [4 marks]

Possible reasons include a combination of why cash outflows for the bakery business are likely to exceed cash inflows:

• A lack of marketing exposure to create sufficient sales revenue at the bakery
• Inability to attract customers away from well-established supermarkets that provide bakery products
• High set-up costs which will take several months (at least) to recover once the bakery is operational
• Ongoing expenses (such as salaries and rent) may initially exceed cash inflows from new customers.

Mark as a 2 + 2

### Calculating cash flow forecasts

To calculate cash flows for each time period, the following are needed:

• Opening balance
• Net cash flow
• Closing balance

The opening balance in a cash flow forecast refers to the value of cash held by a business at the start of a trading period (usually the beginning of the month).

Net cash flow is the numerical difference between an organization’s total cash inflows and its total cash outflows, per time period.

The closing balance in a cash flow forecast refers to the value of cash held by a business at the end of a trading period (usually the final day of the month), which therefore becomes the opening balance for the next time period.

Closing balance = Opening balance + Net cash flow

#### Cash flow forecasting formulae

Net cash flow                =     Total cash inflow – Total cash outflow

Closing balance            =     Opening balance + Net cash flow

Opening balance          =     Closing balance in previous month

#### Top tip!

Remember that a cash flow forecast (CFF) is different from a cash flow statement (CFS). A CFF is a prediction of the cash flows in and out of a business over the foreseeable future. The CFS shows the actual cash inflows and outflows for a specified time period.

#### Exam practice question 2

The chief accountant of 360 Computers has compiled the following financial data: opening balance = \$50,000, total cash outflows = \$120,000, and total cash inflows = \$110,000.

Calculate the closing balance for 360 Computers.   [2 marks]

Net cash flow = \$110,000 minus \$120,000 = (\$10,000)

Closing balance = \$50,000 + (\$10,000) = \$40,000

Award 1 mark for showing the working out.

Award 1 mark for the correct answer, i.e. \$40,000.

#### Exam practice question 3

Ortega Football Academy’s cash flow forecast shows a closing balance of \$80,000 at the end of this month. Carlos, the finance director, then discovers that debtors of \$12,000 have yet to be included and there is an outstanding invoice of \$18,000 that needs to be paid. Calculate the closing balance for Ortega Football Academy.          [2 marks]

Ortega Football Academy’s closing balance = \$80,000 + \$12,000 – \$18,000 = \$74,000

Award 1 mark for showing the working out.

Award 1 mark for the correct answer, i.e. \$74,000.

#### Exam practice question 4

Refer to the figures below for excerpts from Tonina & Co.’s cash flow statement.

Opening balance:   \$135,500

Cash inflow:            \$532,500

Cash outflow:          \$352,500

a.  Define the term cash flow statement.                       [2 marks]

A cash flow statement shows the actual cash inflows and outflows of an organization for a specified time period.

b.  Calculate Tonina & Co.’s net cash flow.                     [2 marks]

Net cash flow = Cash inflow – Cash outflow

NCF = \$532,500 – \$352,500 = \$180,000

Award 1 mark for the correct answer

Award 1 mark for appropriate working out.

c.  Calculate Tonina & Co.’s closing balance.                 [2 marks]

Closing balance = Opening balance + Net cash flow

Closing balance = \$135,500 + \$180,000 = \$315,500

Award 1 mark for the correct answer

Award 1 mark for appropriate working out.

#### Exam practice question 5

Complete the 3-month cash flow forecast for Mustang & Ford Winery.       [4 marks]

 Dec (\$) Jan (\$) Feb (\$) Sales revenue 8,500 7,500 Bank loan 0 4,000 Cash inflow 10,500 7,500 Cost of goods sold 5100 3900 4500 Salaries 2000 2000 2000 Rent 1800 1800 1800 Other costs 300 400 Cash outflow 9,280 8,000 Net cash flow -780 -1,200 Opening balance 0 -780 1,720 Closing balance 1,720 520

Cash flow forecast for Mustang & Ford Winery:

 Dec (\$) Jan (\$) Feb (\$) Sales revenue 8,500 6,500 7,500 Bank loan 0 4,000 0 Cash inflow 8,500 10,500 7,500 Cost of goods sold 5100 3900 4500 Salaries 2000 2000 2000 Rent 1800 1800 1800 Other costs 380 300 400 Cash outflow 9,280 8,000 8,700 Net cash flow -780 2,500 -1,200 Opening balance 0 -780 1,720 Closing balance -780 1,720 520

Award 1 - 2 marks for an answer that shows some understanding of cash flow forecasting, although there 3 or more errors. Apply the own figure rule (error carried forward), as appropriate.

Award 3 - 4 marks for an answer that shows good understanding of cash flow forecasting. For 3 marks, allow up to 1 error. Apply the own figure rule as appropriate.