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Managerial Accounting. Illustrate your essay with specific examples.

A cash flow forecast should show how much money you expect to be flowing into and out of your bank account and when. It must show that the business will have enough access to money to survive over short and long term periods. For a new business proposal to be considered feasible a cash flow statement must be as accurate as possible and the source of funding must be identified. As a business becomes more established, its cash flow statement will become more predictable but it is highly unlikely that it will ever be 100% correct. The importance of a business managing its cash flow can not be underestimated. Businesses can have strong results in terms of profits but at the same time have shortfall of cash that can result in major problems (Gowthorpe, 2005). A business plan needs to include a cash flow forecast so that the number of sales needed for the business to succeed is known. The profit and loss account and the balance sheet show how things stand financially for the business at that specific point in time (a snapshot) and can be used as a measurement to see if the business is achieving its sales targets. A business needs cash to pay its employees, to buy new non-current assets, to settle claims against the business, etc. A new business proposal must include a minimum amount of cash flow that the business needs to survive. 'What if' scenarios are common practice for businesses when producing cash flow forecasts to see what the effect on the company if sales are up and down by percentages given expected profit margins. McLaney and Atrill (2004) claim the main underlying reason a business goes 'under' is because they are unable to find the amount of cash they owe.

There are three main parts to a cash flow forecast:

This is company X's profit and loss account. The total overheads for the year end are carried over from the cash flow forecast to help calculate the company's operating profit. Also included is the amount of money the business will retain and plough back in to the company for various things such as equipment. With depreciation taken in to account, it would extremely useful in helping to prove the feasibility of a project it should this figure be known.

This is the balance sheet for company X. The balance sheet is merely a snapshot of the businesses financial position and shows the working capital requirement of the business (current assets less current liabilities). The balance sheet is useful for working out a number of ratios to maintain effective financial control, such as the total capital employed (Barrow et al, 2005). Whilst this data is extremely useful once the business is operating, it is very difficult to use the balance sheet toward proving a project's feasibility without accurate data.

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