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A cash flow

A cash flow forecast is a detailed estimate of a firm’s future cash inflows and outflows per month. From this can be derived the monthly cash flow and, by adding together each month’s figures, the cumulative cash position. The purpose of this is to see how the cash received by the company will flow through the business over a period of time in the future. It will show the amount of expenditure and income, and show the left over balance of each month. They are mainly used to see how the money will flow through the business and whether the company will receive a negative cash flow that will be purely temporary. Then the required arrangements can be made to help the company fund this loss until it can have a positive cash flow.

A company such as Keepsake Ltd would use the cash flow like other companies to see how money flows through their business. If Keepsake Ltd did not know how the cash would flow through the business; it might receive a period where there is a lack of working capital. This would mean that the company would not be able to pay its staff on time, it would

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not be able to take advantage of cash discounts offered by its creditors for prompt payment or it might not be able to pay its creditors at all. This would lead to legal action by the creditors to recover their debts and could force the business to close down.

But the main reason why Keepsake Ltd would need a cash flow forecast is because Keepsake Ltd accountants can identify times of the year when there will be shortfalls of cash, this would give them time to arrange an overdraft with the bank to cover it. Also surpluses of cash would be seen, meaning that Keepsake Ltd could re-invest this money back into the business. This will help Keepsake Ltd see if it would survive in the future and to see how much profit or loss it would make. If Keepsake Ltd did create a cash flow forecast and it showed that they were to have cash problems; they would be able to make arrangements to cope with this some way. The cash flow helps accountants of Keepsake Ltd identify when there will be more expenditure going out of the company then income coming in, and also when the company’s income is more than the expenditure.

If Keepsake Ltd were to be taken over by Swift then the cash flow would have added significance, as it is more likely for companies who have just been taken over to have liquidity problems. These are usually due to the company failing to collect its debts from customers, customers not paying in time or giving too much credit to customers. But by using the cash flow forecast, Keepsake Ltd would be able to foresee the company’s future liquidity problems and try to prepare for them.

A cash flow forecast is relevant to a business as a business needs to know how cash will flow through the business, especially if it has certain plans e.g. expansion. This will enable the business to foresee any problems with the way the money flows such as negative cash flow. This will then give them knowledge of what is going to happen, and so enables them to plan for that problems. It will also help them see any surplus cash, which then can be re-invested. The cash flow forecast though mainly will help the business prepare itself beforehand. This is a great help as they will be able to foresee problems, which they can get themselves out of such as going into minus. This then could cause the business to going into major debt, which would cause the business to close down or be taken over.

Explanation of Cash flow forecast for Keepsake Ltd Swift needs this cash flow forecast for the reason made above, and now I will explain the aspects, which make up this forecast and what the figures mean in regards to Keepsake Ltd.

The main aspects of the cash flow forecast are the Receipts or the income, the Payments or the expenditure, the Net cash flow and the opening and closing balance. The receipts are the income, which the company receives; meaning the money it receives from sales of its service. Also they can include grants, which is any form of extra funding which has come from the business or from other sources of finance e.g. loan.

The payments are the amount of expenditure the company has, this means the amount of money, which the company has to pay out from the business, these include paying suppliers, the cost of sales, debts etc. The net cash flow is the amount, which the company has made or lost for its self, this is found by taking the total amount of expenditure from the total amount of income received. But this amount is exclusive of tax and any other hidden costs. The opening balance is the amount of money, which the company had made that in the previous month and the closing balance is the amount, which is made from the income minus the expenditure added onto the opening balance that month. All these features make up the cash flow forecast.

I will now explain what the figures mean in context to Keepsake Ltd. In the cash flow forecast Keepsake Ltd would receive income from grants, equipment which it hires out, the cups it makes and sells, the hire of marquees, any merchandise it sells through the advertised event, the hire of their platforms and any souvenirs it sells. But Keepsake Ltd would also have expenditure on any bank loans, any novelties it sells, other additional costs, any overheads, the transport costs, the hire of vehicles and the wages of its workers. This accounts for all Keepsake Ltd income and expenditure or inflows and outflows.

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