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Cash forecasts for Peter's Windows Limited

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Problems in business

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Cash forecasts for Peter's Windows Limited
01/01/10 – 30/06/10

Jan Feb Mar Apr May Jun
Cash inflow (£)
Sales 8,000 12,000 18,000 18,000
Capital introduced 19,000 0
Total Receipts 19,000 0 8,000 12,000 18,000 18,000

Cash outflow (£)
Cash purchases (14,000) (750)
Payments to creditors 18.000 (14,000) (14,000) (16,000) (16,000)
Owner renumeration (900) (900) (900) (900) (900) (900)
Wages/salaries (1,900) (1,900) (1,900) (1,900) (1,900) (1,900)
Rent (3,000)
Rates (950)
Electricity (430)
Advertising (700)
Van (asset purchase) (400) (400) (400) (400) (400) (400)
Total payments (31,350) (3,200) (17,950) (17,630) (20,150) (19,200)

Net cash flow (12,350) (3,200) (9,950) (5,630) (2,150) (1,200)

Opening bank balance (12,350) (15,550) (25,500) (31,130) (33,280)

Closing bank balance (12,350) (15,550) (25,500) (31,130) (33,280) (34,480)


Question 2

Task 2.1

Cash forecasts for Peter's Windows Limited
01/01/10 – 30/06/10

Jan Feb Mar Apr May Jun
Cash inflow (£)
Sales 8,000 12,000 18,000 18,000
Capital introduced 19,000
Total Receipts 19,000 8,000 12,000 18,000 18,000

Cash outflow (£)
Cash purchases (7,000) (750)
Payments to creditors (10,000) 18.000 (14,000) (14,000) (16,000)
Owner renumeration (900) (900) (900) (900) (900) (900)
Wages/salaries (1,900) (1,900) (1,900) (1,900) (1,900) (1,900)
Rent (3,000)
Rates (950)
Electricity (450) (430)
Advertising 700
Van (hire cost) (350) (350) (350) (350) (350) (350)
Total payments (24,300) (3,150) (3,900) (17,580) (18,100) (19,150)

Net cash flow (5,300) (3,150) 4,100 (5,580) (100) (1,150)

Opening bank balance (5,300) (8,450) (4,350) (9,930) (10,030)
Closing bank balance (5,300) (8,450) (4,350) (9,930) (10,030) (11,180)

Task 2.2

Cash forecasts for Peter's Windows Limited
01/07/10 – 31/12/10

Jul Aug Sep Oct Nov Dec
Cash inflow (£)
Sales 21,000 21,000 21,000 21,000 21,000 21,000
Capital introduced
Total Receipts 21,000 21,000 21,000 21,000 21,000 21,000

Cash outflow (£)
Cash purchases
Payments to creditors (16,000) (16,000) (14,000) (14,000) (14,000) (14,000)
Owner renumeration (900) (900) (900) (900) (900) (900)
Wages/salaries (1,900) (1,900) (1,900) (1,900) (1,900) (1,900)
Rent (3,000)
Rates (700)
Electricity (450) (450)
Advertising (700) (700)
Van (hire cost) (350) (350) (350) (350) (350) (350)
Stationary (250)
Total payments (22,600) (19,400) (19,850) (20,300) (19,150) (19,850)

Net cash flow (1,600) 1,600 1,150 700 1,850 1,150

Opening bank balance (11,180) (12,780) (11,180) (10,030) (9,330) (7,480)
Closing bank balance (12,780) (11,180) (10,030) (9,330) (7,480) (6,330)

Question 3

The importance of cash flow is paramount to the success of any business. It must be distinguished from the P&L in that it does not show profitability but rather liquidity. In the scenario above had Peter's Windows Limited made a sale for £100,000 in December 2010 this would probably be sufficient to repay the capital and put the company in an extremely profitable position, however if that sale was not due to be paid until say one year later then the cash flow model would be unaffected. Or, worse if the stock to fulfill the order needed to be paid for immediately then the business (whilst still being profitable) would have serious cash flow issues. Should a company be insufficiently liquid to meet its debts as they arise it may be trading unlawfully, it may be sued by its creditors and/or forcibly wound up and (in the course of trade) it will certifiably lose credibility as to its financial probity which will directly harm the business both in terms of reputation but also (most especially in this kind of industry) the 'business community' may decide that it is in no longer prudent to extend credit to Peter's Windows Limited. We can see above the the difference two month's credit makes over one month's credit made ...

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