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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 leverage of the 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

Based on a statement of cash flows, this forecast begins by showing how forecast operating cash flow is to be generated. That represents cash generated solely as a result of core trading operations making it something you need to know.

It is calculated by adding the changes in the value of net current assets (working capital) in the forecast year to forecast net operating revenue. Banks, other senior lenders and investors will pay close attention to operating cash flow forecasts.

That is because an operating cash flow forecast will not only measure the extent to which the business will be capable of financing its trading operations but of servicing 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 will give lenders cause for concern.

Calculating Operating Revenue

Provisions such as depreciation do not involve cash transfers and so are added back to operating revenue. Interest charges are also added back because they are concerned with the financial arrangements of the business as opposed to its trading. Equally revenues not associated with trading such as from investments or the sale of a fixed asset are deducted.

Changes in current assets and liabilities (working capital) on the previous year are next added to complete the calculation of the year's operating cash flow as follows.

Current Assets and Cash Flow

Changes from the current 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 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 Operating Cash Flow

The importance of the operating cash flow forecast is that it represents the cash flow you are predicting the business will be generating solely through its core trading activities. If an operating cash flow forecast needs to be improved, the following will all make a difference.

 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 Net Cash Flow 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 External Financing

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.

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