Page 263 - Cambridge IGCSE Business Studies

20: Cash-flow forecasting and working capital

Delaying the purchase of the delivery vehicle improves the cash flow by removing

the negative cash balance in February. If the business cannot delay the purchase of
the delivery van by one month it has two options:

■ Use another source of finance for the purchase of the van, for example hire
purchase, leasing or a bank loan.
■ As the cash shortage is forecast to be very short-term, then the business may
arrange an overdraft with the bank to cover the shortfall.

■ Both of these options are more costly than delaying the purchase of the vehicle
until March.

ACTIVITY 20.2

The following cash-flow forecast has been produced by the Finance Manager of Lucky Charm Jewellers (LCJ).

Jan Feb Mar Apr May Jun
Cash inflow
Receipts 12 14 14 18 26 29

Total inflow 12 14 14 18 26 27
Cash outflows
Payments 16 18 18 20 20 22

Total outflow 16 18 18 20 20 22 261
Net cash flow (−4) (−4) (−4) (−2)
Opening balance 10 6 2 (−2)

Closing balance 6 2 (−2) (−4)

1 Calculate the closing balance for both May and June.
2 Comment on the forecast cash flow for LCJ between January and June.
3 How could the Finance Manager use the cash-flow forecast to better manage LCJ’s cash flow?

Interpreting cash-flow statements
Hire purchase, leasing, bank Remember, the most important line on any cash-flow statement is the one

loan: see Chapter19, page 252. containing the ‘closing balance’. If a business’s cash position is forecast to become
negative for a short period of time, management might decide to fi nance this
with an overdraft. However, overdrafts can be a very expensive source of fi nance.

Before deciding to use an overdraft, management should consider ways of

Overdraft : see Chapter 19, removing or reducing the cash shortage. Even if they only reduce the size of the
page 251. forecast cash shortage, this will at least reduce the size and cost of any required
overdraft .