Months Cash Flow Forecast: April to September

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April

May

June

July

August

September

Inflows

Bank Loan

5000

Savings

3000

Sales

4500

4500

4950

4950

4950

Total Inflows

8000

4500

4500

4950

4950

4950

Outflows

Equipment

4200

Wages

800

Purchases

1200

1200

1200

1200

1200

Loan Repayment

75

75

75

75

75

Rates

130

130

130

130

130

130

Drawings

1900

1900

1900

1900

2200

2200

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500

125

125

125

125

125

Insurance

105

105

105

105

105

105

Rent Premises

350

350

350

350

350

350

Total Out flows

7985

3885

3885

3885

3885

3885

Opening Bank Balance

15

630

1245

2310

3375

Net Cash Inflow/(Outflow)

15

615

615

1065

1065

1065

Closing Balance

15

630

1245

2310

3375

4440

Tina’s cash flow position appears to be very strong. The Cash flow forecast drawn above is the best evidence of this statement. How ever, her initial success depends upon the availability of bank loan, which, if not provided, could make her suffer negative cash flows for a lot of months. It seems, as her industry PR is strong and she is reasonably confident that her services would be highly utilized by customers in return for a decent sum of money. The problem that persists is the dependence on bank loan and the equivalency in debtor’s and creditors days. It is not advisable that the cash should be received and paid in the same periods, since it could give rise to liquidity problems. Similarly, complete dependency on bank loan is an area of uncertainty.

Two adjustments that I would suggest are:

1- Demand cash from customers the moment service is provided. Cleaning services are charged very nominally, and customers can easily pay for them out of their pockets. No credit needs to be given.

2- Based upon the strength of cash sales, avoid obtaining loan from the bank, which would give rise to unnecessary finance cost.

The readjusted bank balances are shown below.

April

May

June

July

August

September

Pre-adjusted Balance

15

630

1245

2310

3375

4440

Less: Inflow from bank loan

(5000)

Add: Cash from Sales

4500

4500

4950

4950

4950

4950

Add: Savings from interest

75

75

75

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75

75

Less: Cash from credit sales (previously)

(4500)

(4500)

(4950)

(4950)

(4950)

Re Adjusted Balance Opening

(485)

(265)

1505

3890

7340

Readjusted Balance Closing

(485)

(265)

1505

3890

7340

11855

It is easily detectible that the closing balance for September is $7415 greater than it had been previously. Bevan would surely reap higher profits if she follows the above recommendations. Although, two initial months would suffer a negative cash flow, yet they can be survived by obtaining over draft from the bank. However, the after effects of this short sacrifice would bring fruitful results.

The working capital ratio is also known as the Current Ratio. It can be calculated as follows:

Current Assets

Current Liabilities

Hence, to calculate the working capital ratio, the above formula can be employed

1500+3000+300

2500+1500

4800

4000

1.2:1 > Working Capital Ratio

The working capital ratio is just perfect, and does not need any particular adjustment. However, it seems as Lorna Lane is overtrading. She has a bank OD, and her cash is very low. However, her debtors and inventory show very high figures. This is due to excessive credit selling, and purchase of inventory. Lorna should cease to allow large credit allowances, and should be careful about buying as much inventory, as is needed.