Problems within the cash flow forecast

Problems occur with cash flows when the business’s outflows are greater than the opening balance plus the inflows, as this will result in a negative closing balance. This means that the business will not have enough cash to meet payments that are due.

Very few businesses have consistent cash flows throughout the year; they are likely to experience busy times and quiet times. These fluctuations are known as the cash flow cycle.

For some businesses, particularly those in a seasonal industry, these fluctuations can be quite severe. Someone who owns a small bed and breakfast in a seaside town will have to pay costs like rent, heat and light, insurance and bank charges throughout the year. In season, they will also have additional costs like wages and stock, but it might only be in the summer months where there are any cash inflows

Activity: E.1.4:

Using the hyperlinked - cash flow forecast - identify when seasonal fluctuations can create quite severe potential shortfalls.