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.

What Does an Operating Cash Flow Forecast Mean

An operating cash flow forecast represents cash that is expected to be generated solely by a company’s day-to-day core trading activity.

This is going to be the only cash available to service debt going foraward. For that reason, the message arising from a negative operating cash flow forecast would be that you do not expect that your company will have enough cash available in order to service existing and future borrowings.

All of the operating and net cash flow forecasts shown above are calculated by Figurewizard simply from your own figures for sales, margin overheadsa and son on and a few simple ratios - Nothing else.

How to Calculate a Net Operating Revenue Forecast

This is essentially the operating profit arising from income and expenditure concerned with core trading and nothing else.

In order to calculate this Figurewizard first adjusts the pre-tax profit forecast by eliminating "provisional" charges.

Provisions for bad debts and depreciation do no involve cash transfers so these are then added back too, as are interest charges. While interest is charged to the profit forecast it only relates to financing, not core trading activity.

Exceptional items, such as revenue from the sale of an investment or of fixed assets which are also not concerned with revenue obtained from from trading activity are added back too.

What is left represents net operating revenue.

Working Capital and Calculating Operating Cash Flow

The next step comes from the balance sheet. Changes up or down in forecast net current assets (working capital) from those of the previous year are added to net operating revenue.

That completes the calculation of the operating cash flow forecast. What follows is how and why Figurewizard's changes to forecast current assets and liabilities reflect changes in the operating cashflow forecast.

Current Assets and Calculating 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 Calculating 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.

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. Using the What-If Calculator / Planner is ideal for this.

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".

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.

How to Produce an Operating Cash Flow Forecast

Producing this operating cash flow forecast using Figurewizard only calls for your own predicted figures for sales, overheads, financing and so on and a few undemanding ratios. Our system does all of the rest.