Use the following information to complete a cash flow forecast for Timmy's Toy Shop: Sales per month are forecast to be $23,000 except in the run up to Christmas when October sales are forecast at $25,000 and November and December sales are anticipated to be $30,000. Timmy's Toy Shop receives $500 per month interest on an investment it has in another business Rent on the shop unit is $5,800 per month although the landlord has advised the Timmy that the rent will increase to $6,000 in December Bills are paid quarterly in January, April, July and October. Timmy pays $5,000 each quarter. Salaries usually cost Timmy $10,000 per month however in the last three months of the year he will take on temporary staff during the busy Christmas period and this will cost him an extra $2,000 per month. Between January and August Timmy expects to pay $5,100 per month for inventory. In September that will rise to $8,000 and in October and November it will be $10,000. In December inventory costs will fall to $7,000. Theft has been a problem at Timmy's Toy Shop so additional security equipment is going to be installed in May. This will cost $50,000 and Timmy is hoping to get a loan to pay for this for which repayments will be deferred until the following year The opening balance for Timmy's Toy Shop in January is $100. When you have completed the cash flow forecast, answer the following questions: 1. Why is it important for Timmy to draw up a cash flow forecast? 2. What problem does Timmy face in January and October, and what is causing this problem? 3. What could Timmy do to eliminate this problem in future? Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Receipts Sales Interest on investments Loan Total receipts Payments Rent Bills Salaries Equipment Stock Total payments Net cash flow Opening balance Closing balance True/False cash flow activity 1. Cash is not as important as profit 2. Net cash flow equals receipts minus payments_ 3. To improve cash flow, businesses should aim to reduce cash inflows 4. Cash flow is the movement of cash into and out of a business 5. The closing balance can be calculated by combining the net cash flow with the opening balance 6. During a recession it is usually easy to borrow money 7. To improve cash flow businesses could negotiate longer payment terms with their suppliers 8. Receipts are inflows of cash from things like sales of goods and interest on investments 9. Poor cash flow is rarely a reason why businesses fail_ 10. Management accountants can help firms to manage their cash flow