Business studies

Assignment: 01
Subject: usefulness and
limitation of cash flow forecast.

Cash flow is the continuous movement

of cash into and out of a business. It is
important for a business to continually
monitors and controls its cash flow. It must
ensure that it has enough cash for immediate
spending.
However, business should avoid holding
too much cash because cash is an
unproductive asset. Holding cash means that
a business might lose out on profit from
investing the cash.
Most businesses produce a regular cash flow
forecast. This lists the likely receipts (cash
inflows) and payments (cash outflows) over a
future period of time. All the entries in the
forecast are estimated because they have not
occurred yet.
Businesses draw up cash flow forecast
statements to help control and monitor cash

flow in the business. Advantages of using

statements to control cash flow:
When trying to raise finance, lenders
often insist that businesses support
their applications with documents
showing business performance,
outlook and solvency. A cash flow
forecast will help to indicate the future
outlook for the business.
Careful planning in business is vital.
Cash flow forecast will help to clarify
aims and improve performance.
Forecasts can help to identify in
advance when a business might wish
to borrow money. In addition, if a large
cash surplus is identified in a particular
month, this might provide an
opportunity to buy some new machine,
for example.

 During and at the end of the financial

year a business should make
comparisons between the predicted
figures in the cash flow forecast and
those which actually occur. By doing
this business can find out where
problems occurred and rectify it.

Although an entrepreneur should take

every reasonable step to increase the
accuracy of the business cash flow
forecast- by using relevant market
research, for example- it would be foolish
indeed to assume that it will always be
accurate. So many factors, either internal
to the business or in the external
environment, can change to blow a cash
flow forecast off course. This doesnt make
forecasts useless- but, as with any
business forecast, they must be used with
caution and the ways in which the cash

flows have been estimated should be

understood. Limitations of cash flow
forecast:
Mistakes can be made in preparing the
forecast thus giving completely
misleading information and business
taking wrong decisions.
Unexpected cost increases can lead to
major inaccuracies in forecasts.
Wrong assumptions can be made in
estimating the sales of the business,
perhaps based on poor market
research, and this will make the cash
inflow forecasts inaccurate.

Cash flow forecast do not solve cash flow

problems by themselves- but they are an
essential part of financial planning and

can help prevent cash flow problems from

developing.