Preparing a Cash Flow Forecast

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Clarry’s Hair Salon

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David has decided to set up a small hairdressing salon in Maldon (close to where he lives). David has done some very basic initial research into costs and revenue. The cost of the business including fixtures and fittings is anticipated to be £17,000. David raised £8,000 of this from his own savings and he has managed to get a bank loan for the At the moment, David is planning to work alone as a stylist at the salon. He intends to allow himself £320 per week in wages. He has a friend who will keep the accounts and who will also do other jobs like washing hair and answering the telephone. David will pay her £220.80 per week. On a Saturday, he plans to take on a schoolgirl/boy who will receive £27.20 for an eight hour day.

As the business is only going to be based in a small town, David will be reliant on regular customers. To keep customers he must keep his prices down. He can do this as he is not taking a large wage for himself, and is paying the minimum wage for his two members of staff.

2 Preparing a cash flow forecast Prepare an annual cash flow forecast for David’s business using the monthly data provided below. Do this using the corresponding EXCEL file.

1. David is planning to open his new salon, Clarry’s in September. He has of course raised £8,000 of this himself, which he will put into a bank account as his opening balance. He will also obtain a loan in September for £9,000.

2. David estimates the following revenue from the salon for each month over the coming year.

Month Predicted Month Predicted Revenue Revenue September 3500 March 4500 October 4000 April 4600 November 4500 May 4600 December 4500 June 4400 January 4500 July 4400 February 4500 August 4300

3. David will pay at the beginning of September £17,000 for equipping the salon with its fixtures and fittings.

4. David estimates the following cost of purchases will be as follows each month. He will receive one month’s credit from his suppliers, so will pay a month after receiving goods.

Month Predicted Cost Month Predicted Cost of purchases of purchases September 880 March 1200 October 1100 April 1200 November 1100 May 1320 December 1200 June 1320 January 1100 July 1200 February 1100 August 1200

5. David also anticipates the following costs for hot water.

Month Predicted Cost Month Predicted Cost

3 of heating of heating water water September 120 March 165 October 150 April 165 November 150 May 180 December 165 June 180 January 150 July 165 February 150 August 165

6. Loan repayments at a rate of £3000 a year, payable in monthly instalments starting in October.

7. David also plans to spend £150 advertising the launch of the salon in September, and then £75 per month afterwards.

8. Rent/Rates on the shop needs to be budgeted at £375 per month.

9. David’s wages will be £320 per week (Approximately £1280 per month)

10. David will pay his friend £220.80 per week (Approximately £883.20 per month) for doing his accounts and general salon work.

11. If a schoolgirl/boy is employed they will get on average £108.80 a month.

12. There will be general electricity and heating expenses of £110 per month.

Implications of regular and irregular cash inflows and outflows.

David is looking for further investment into his business, but potential investors have asked for further information about the proposed cash flow of Clarry’s. Provide a report explaining all of the below to potential investors.

4 A – Complete an accurate cash flow forecast for David’s business

B – Explain why it is important to conduct a cash flow forecast for a business such as David’s

C – Explain the dangers of poor or irregular cash flow

D – Suggest three improvements that David could make to his cash flow, at least one of these must link to his inflows

E – Draw up a new cash flow forecast to show how the improvements you have suggested would impact on the businesses cash flow.