5. What is a Cash Flow Forecast?

A cash flow forecast is also known as a cash budget. As a forecast or budgeted statement it deals not with what has happened but with what is expected and planned to happen. It should not be confused with a cash flow statement which is drawn up after the event. Cash accounting is not concerned with sales revenue, costs, profit or loss. It is only concerned with the flow of cash into and out of a business. Consequently, credit sales do not become positive items in a cash flow forecast until the cash flows in. Similarly, purchases of inputs are not negative items until the cash flows out. Non-cash items in a profit and loss account (notably provision for depreciation) do not feature at all in cash accounting. We can therefore define a cash flow forecast as a plan which states in detail the cash flow which is expected to take place over a specified future period.

6. Cost

Fixed assets are “assets which a business intends to use on a continuing basis”. Thus purpose, rather than physical nature, determines whether something counts as a fixed asset. Cars, for example, which are fixed assets for many companies, are mostly current assets (stock) for Rover, which sells cars. Accountants “capitalize” spending on fixed assets in the balance sheet, rather than at once writing it off in full in the profit and loss account. But they do so only where (a) they can identify fairly accurately the cost of an asset and (b) they expect the cost to be recovered in full, normally out of future sales revenue. Point (a) rules out most spending on building up brands and general business “goodwill”. It is very difficult to split total spending on promotion between current and future benefits. Point (b) rules out the cost of most technical research. Companies probably wouldn't choose to spend the money on research unless they expected it to “pay” (in the future), but a lot can go wrong – both on the technical side and the commercial side – and it is often difficult to come up with solid enough evidence. For many fixed assets it is easy to tell the cost. In addition to the basic invoice cost of the asset itself, it may include costs of transporting and installing equipment, legal costs on the purchase of property, etc.

7. Price

In theory organisations price optimally by using their knowledge of cost and revenue relationships to calculate the profit maximising price level. In reality organisations may adopt a very different approach to pricing.

To some extent the pricing practices followed will be determined by the objectives of the organisation. It is not usually the case that identical procedures are used by firms which seek to maximise profits as those which seek to maximise sales. It is also possible that pricing strategies in the short run are followed which do not lead to short-run profit maximisation, but instead to maximisation of long run profits.

There is no single approach to the way organisations develop the prices for their products and in some instances empirical studies (actual studies of how firms price) give conflicting views. Differences can also exist between what decision makers say they are doing and what they are actually doing.