To what extent would drawing up a Cash Flow Forecast increase the chances of this business being successful? (15 Marks)
A cash flow forecast is a forecast of when money is coming in and coming out of the business based upon day to day expenses. The importance of a cash flow forecast is so that the business owner can monitor the day to day expenses such as bills, interest on loans etc and that way they know where the cash is going and how much is coming in. The objectives of the business would be in the long term to make a profit however, there would be less ambitious targets for the first year of business. These objectives may consist of a break even chart or in general, a strong positive cash flow. This can be achieved with having an organised cash flow forecast. It may be difficult for a new business to forecast sales because there is no previous data to base the predictions on. This means that it needs to be as accurate as possible however, you cannot predict the future so therefore the cash flow forecast is only as good as the sales prediction and as good as the cost estimates. In reality the predictions may not be true. This means that further down the line, the forecast may not be as accurate as originally thought when it was drawn up. The main objective for the newly established businesses will be to survive as a business. Taking aside the short or long term success, surviving will be the main priority. Along with this, managing cash is also important. The cash flow forecast will enable the business owner to see how the cash is managed and whether an overdraft from the bank is needed and if an overdraft facility is needed. It will also highlight any immediate problems which will have to be sorted out. Another problem is that it doesn't tell you anything about profitability and focuses purely on cash so you don't really know a long term target. To overcome this I would suggest to draw up a Break-even plan as this focuses on sales and when losses turns...
Please join StudyMode to read the full document