Lesson 1, Topic 1
In Progress

2.2 An explanation is given of the use of cash flow forecast as a budgeting tool.

ryanrori January 13, 2021

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Turnover:  Usually calculated by year, turnover is the volume of shares traded relative to the total amount of shares owned.

Income revenue:  In business, revenue is the amount of money that a company actually receives from its activities, mostly from sales to customers. To investors, revenue is less important than profit, or income, which is the amount of money the business has earned after deducting all the business’s expenses.  Revenue growth, as well as income growth, is considered essential for a company’s publicly traded stock to be attractive to investors.

Sales/earnings You go into business to make money. Unless an organisation is a not-for-profit enterprise, its goal is to make money for the owners. In order to make money, the business must have income to pay its employees, utility bills, costs of production and other operating expenses. If a company has cash left over after paying its expenses, it has earnings. Earnings are a company’s net profit.  The nature of a business defines how it makes earnings. All businesses generate income by providing either goods or services to clients

Profits:  Revenues - Expenses = Profit.  So, to increase profits you must raise revenues, lower expenses, or both.  This checklist is a series of questions with comments to help you analyse your profits.

A cash-flow budget records the cash you expect to receive and pay out over a period of time, so it:

  • helps you understand and plan for likely peaks and troughs in your cash flow
  • gives you important benchmarks/indicators of what you want to achieve
  • allows you to make informed decisions when planning additional expenditure
  • shows your bank you’re managing your cash flow, and whether you can afford additional borrowings.

There are various factors to consider when preparing your cash-flow budget, including the time period. This depends on the size of your business, but it’s common to prepare a6-month or 12-month cash-flow budget.

A six-month cash flow budget minimizes the amount of uncertainty involved in the budget. It also predicts future events early enough for you to take corrective action. However, if you’re applying for a loan, you may need to create a cash flow budget that extends for several years into the future, as part of the application process.

The primary purpose of using a cash flow budget is to predict your business’s ability to take in more cash than it pays out. This will give you some indication of your business’s ability to create the resources necessary for expansion, or its ability to support you, the business owner. The cash flow budget can also predict your business’s cash flow gaps — periods when cash outflows exceed cash inflows when combined with your cash reserves. You can take cash flow management steps to ensure that the gaps are closed, or at least narrowed, when they are predicted early. These steps might include lowering your investment in accounts receivable or inventory, or looking to outside sources of cash, such as a short-term loan, to fill the cash flow gaps.

Preparing a cash flow budget involves four steps:

  1. preparing a sales forecast
  2. projecting your anticipated cash inflows
  3. projecting your anticipated cash outflows
  4. putting the projections together to come up with your cash flow bottom line

Developing a format

Set up a worksheet that includes all your receipt and payment transactions, with appropriate columns for the number of months you’re budgeting for. The procedure for working out your cash-flow budget is:

1. take your beginning cash balance

2. add your budgeted cash inflows

3. deduct your budgeted cash outflows.

The result will be your budgeted cash balance.

Improve your cash flow

If it feels like your cash only flows in one direction – out – these cash management basics can help. Even without a cash-flow budget, they can work to your advantage.

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Accelerate the flow of cash from your customers

Credit policy

Review a customer’s credit history before you extend credit on a sale.

Consider whether you can reduce your trading terms.

Ensure you follow up overdue customer payments swiftly and effectively.

Billing procedure

Ensure your invoices show all the information your customers need. Set them out so they’re easy to pay.

Issue invoices promptly


Consider customer deposits prior to sale.

Shipping and handling

Reduce the time from customer order to delivery.


Consider factoring your customer invoices to speed up the collection process.


Delay your cash outflows

Your suppliers’ credit policies

Talk to suppliers to obtain maximum credit terms when setting up a trade account.

Credit cards

Use your credit card to take advantage of interest-free periods and delay your payment.

Delay payment

If you have a cash shortage, contact your supplier and ask for additional time to pay. You may be surprised at the support you receive.

Other ways to help your cash flow


Stock on hand

Holding excessive stock keeps vital cash out of the business. Review your stock levels to ensure you hold stock for the least amount of time between buying and selling.

Accelerate your cash flow with a special promotion.

Review slow-moving stock to see if you can either return it to your supplier for a credit, or sell it at a discount to create cash flow.


Profit margins

Review your profit margin to ensure you get the best profit.

Review your prices and consider an increase.

Review your suppliers’ prices to ensure competitiveness.



Review your overheads to identify any costs you can reduce, or eliminate.



Get additional funding from your bank, or credit institution. Your cash-flow budget should help identify in advance what your future cash needs will be.


Owners’ contributions

Owners can contribute additional capital to the business.


Owners’ salaries

Reduce owners’ salaries or drawings from the business.



Review your other business assets to identify non-core assets you can sell to inject cash into your business.



Other options

If you’re still having trouble with your cash flow, consider the following.

Review your cash-flow budget

  • Review your actual cash flow for one month and compare it with your cash-flow budget. Identify any gaps between the results you achieved in the month under review against the budget you developed for the month.
  • Develop strategies to manage any areas of concern.
  • Review your actual cash flow for the three months prior to the budget period so you understand your cash flow better. Review your cash flow budget to check your expectations are reasonable.

Get advice

Your accountant should be able to help you prepare a cash-flow budget. If you’re the leader of a team, you may find it beneficial to work through any cash-flow problems, or opportunities with your team. Consider whether you need assistance from your accountant in managing your relationship with your creditors.