This is a Working Example of our Forecasts
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Report name: Sample Forecast

How Net and Operating Cash Flow Forecasts are Calculated

Cash generated by core trading describes operating cash flow. Net cash flow describes changes in the indebtedness or cash position of a business.

forecast for year beginning the 1st.May 2017May 2018May 2019
Pre-Tax Profit / Loss94,38199,038252,249
add: Interest Charges5,0627,4695,394
add: Depreciation10,87617,54320,290
less: Profits from Sale of Fixed Assets000
Net Operating Revenue110,319124,050277,933
Cash Flow from Current Assets
Increase / Decrease Stock / Inventory-90,000-25,000-20,000
Increase / Decrease Account Receivables-36,092-7,086-53,371
Increase / Decrease Prepaid L/C000
Cash Flow from Current Liabilities
Increase / Decrease Trade Creditors20,821-62616,557
Increase / Decrease Sundry Creditors5,4283,9533,994
Increase / Decrease VAT1,7312,1672,708
Increase / Decrease from Working Capital -98,111-26,592-50,113

Net Operating Cash Flow

Interest Paid-5,062-7,469-5,394
Corporation Tax Paid-6,000-13,613-18,495
Cash Flow from Tax and Interest -11,062-21,082-23,888
Paid up Share Capital Issued in the Year000
Purchase of Fixed Assets-55,000-15,000-50,000
Sale of Fixed Assets006,000

Dividends Paid

Cash Flow from Investing Activity-55,000-15,000-44,000
Net Cash Flow-53,85461,376159,931

Increase / Decrease in Asset Financing

Increase / Decrease in Loans000
Increase / Decrease in Factoring000
Increase / Decrease in the Bank20,939-49,739-169,693
Increase / Decrease in External Financing 53,854-61,376-159,931

What is an Operating Cash Flow Forecast

This operating cash flow forecast is automatically produced by Figurewizard's system. It represents cash flow from core trading available to service debt.

It is automatically calculated and applied by Figurewizard's system using nothing more than your proposed figures for sales, margin, overheads, new fixed assets and financing plus a few simple ratios.

Knowing how an operating cash flow forcast will turn out is crucial as it represents the only cash available for servicing debt. If that is low or negative it could mean that obtaining future financing being more difficult to come by or perhaps not being forthcoming at all.

How to Calculate a Net Operating Revenue Forecast

The first step is to reduce pre-tax profit to that created solely from the company's trading operations involving cash transfers.

Provisions for bad debts and depreciation, neither of which are cash charges are added back to profit: Interest charges are also added back. Although interest involves cash transfers it is solely concerned with financing operations, not trading operations.

Exceptional items, such as revenue from the sale of an investment or of fixed assets are again not concerned with revenue from trading either so are also added back.

The next step comes from the balance sheet. Changes in forecast current assts and current liabilities from those of the previous year are added to net operting revenue. That will complete the calculation of the year's operating cash flow forecast. Figurewizard calculates and applies these as follows:

Current Assets and Operating Cash Flow

Changes from the previous year to the forecast year for current (cash convertible) assets such as cash itself, stock / inventory and accounts receivable all affect forecast operating cash.

If current assets go up operating cash flow goes down.

For example an increase in accounts receivable from £5,000 to £8,00 might represent a £3,000 increase in working capital but in operating cash terms it also represents a £3,000 increase in loans made by a company to its customers, making it a charge to operating cash flow.

Stock / inventory tells the same story: An increase forecasts a charge; a decrease forecasts turning goods on the shelf into cash.

Current Liabilities and Operating Cash Flow

Financing liabilities such as overdrafts, loans or asset financing are excluded, only the difference between current operating liabilities (trade and sundry creditors) and the forecast year's feature.

Here if current liabilities go up, so does operating cash flow.

Trade and sundry creditors represent the commercial credit facilities of a business. Forecasting that to rise from £6,000 to £8,000 effectively adds an increase in loans from creditors of £2,000 into operating cash flow. Forecasting a fall by £2,000 however amounts to using cash to repay creditors instead.

Improving an Operating Cash Flow Forecast

Because operating cash flow represents the cash you are predicting the business to generate solely through core trading activities, any credible improvements you can make the better.

The following describes some of the actions that may be called for.

 1.  Operating Revenue  Cut back on overheads and expenses
 2.  Operating Revenue  Better prices from suppliers to improve gross profit margins
 3.  Cash Flow from Current Assets  Reduce stock / inventory levels
 4.  Cash Flow from Current Assets  Improve cash collection from accounts receivable
 5.  Cash Flow from Current Liabilities  Negotiate better payment terms from suppliers

How a Net Cash Flow Forecast is Calculated

The next step is to add non-operating revenue and expenditure to operating cash flow. For example cash from the sale of fixed assets is added and non-operating expenditure for interest, tax and new fixed assets is deducted. This returns "net cash flow".

That describes how cash or external financing (borrowings or leverage) will rise or fall in the year ahead. If you take another look at cash flow from investing activity you can see that the investment in new fixed assets of £55,000 for year 1 is the principal reason for that year's forecast net cash flow deficit and corresponding increase in borrowings. Cancelling those investments would turn a net cash flow deficit of £44,271 into a £14,871 net cash flow surplus  or lower borrowings.

How to Read the External Financing Forecast

This describes forecast changes in borrowings. Using "Increase / Decrease Bank" as an example:

A positive return (e.g. bank: £20,000) indicates that an extra £20,000 of cash is forecast to be used during the year, meaning that either cash in the bank will decrease by £20,000 or that borrowing from the bank will increase by £20,000.

Similarly a negative return (e.g.. bank: -£20,000) indicates that £20,000 less cash is forecast to be used, meaning that either cash in the bank will increase by £20,000 or that borrowing from the bank will decrease by £20,000.

Operating Cash Flow and Servicing Debt

Forecasting operating cash flow matters. It not only measures the extent to which a business will be capable of financing its trading operations but how ell placed it is going to be to servicie its borrowings too.

Single years' net cash flow deficits do not necessarily signify a problem though, particularly in the case of a business that is profitably expanding: However a trend of such deficits would be likely to pose a few searching questions from bank managers, senior creditors and investors.

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