Cashflow
- Created by: Izzie
- Created on: 02-05-17 18:16
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- Cashflow
- Needs to ensure a positive cash balance for a business
- Cash flow forecasts are forward looking statements trying to predict cash inflow & outflow over a time period
- Cash flow statements are backwards looking statements showing what happened to cash inflow & outflow over a time period
- Potentially profitable businesses may fail as it has cash flow problems
- How to construct a cash flow forecast
- Step 1) Forecast cash inflows
- Owner investments or other finance sources
- Cash sales estimated from sales forecast
- Step 2) Forecast cash outflows
- Payment of fixed costs (don't change with output)
- Payment of variable costs
- Unforeseen expenses
- Payment terms
- Step 1) Forecast cash inflows
- Factors affecting cash flow
- Timings of cash inflows & outflows
- Cash Inflows
- If slow they can cause cash flow issues
- Firms may try speeding up cash inflows by offering early payment discounts or late payment penalties
- May need to chase customers for payments
- Cash Outflows
- If they're too quick it can cause cash flow problems
- Firm may try slowing them down
- May include renegotiating longer payment terms from suppliers (e.g. trade credit)
- Cash Inflows
- Timings of cash inflows & outflows
- Cash flow problems
- Businesses need sufficient cash to meet day to day finances (e.g. buying stock, bills, paying wages etc.)
- Insufficient liquid cash funds mean inability to meet short term debts (e.g. overdrafts, trade creditors etc.)
- Causes of cash flow problems
- Unexpected events
- Stock control
- Seasonality
- Poor/wrong planning
- Credit sales
- Long payment terms
- Additional overhead & day to day expenses
- Improving cash flow
- Increase volume of inflow of cash (e.g. by promotion or trade credit)
- Speeding up timing of inflow of cash (e.g. shorten trade credit terms offered)
- Inflows = capital invested, loans, cash sales, debtor payments
- Reducing volume of outflow of cash
- Slow down timing of outflow of cash (e.g. leasing, pay in installments)
- Outflows = loan repayments, daily running expenses, interest payments)
- Debt Factoring Companies
- They collect the money for you but take a small fee from the sum collected as a form of payment for their help
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