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Why a business may not be covering expenses

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Scenario: You just inherited a gift shop. There appears to be good traffic flow and customers are purchasing items. But, it seems that at the end of the month, there isn't enough money left to pay the bills. Briefly describe the steps you would take to analyze the situation to ensure that your inheritance does not 'go down the drain.'

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Solution Summary

Even though business is good, a gift shop is having trouble paying its bills. Possibly explanations are explored.

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There are two possible reasons why you may be coming up short. It may be that you aren't earning enough, or it may be a cash flow problem. To determine which of these possible scenarios is right, you should forecast your cash flow. Start your cash flow projection by adding cash on hand at the beginning of the period with other cash to be received from various sources. The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations a daily cashflow forecast might be helpful. It is best to pick periods during which most of your fixed costs go out. Include in the forecast:
receipts
payments
excess of receipts over payments - with negative figures shown in brackets
opening bank balance
closing bank balance

It is important to base initial sales forecasts on realistic estimates. If you have an established business, combine sales revenues for the same period 12 months earlier with predicted growth. Note that all forecast figures must relate to sums that are due to be ...

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