Cash flow management and forecasting

Managing cash flow is one of the most important aspects of financial management. Without adequete avaliability of cash from day to day, even a company with high sales could fail. As bills become due there has to be cash avaliable to pay them. If a company cannot pay its bills, suppliers will refuse to deliver and staff will start looking for other jobs. 

Businesses need to continually review their current and future cash position. In order to be prepared and to understand future cash needs, businesses construct a cash flow forecast. This sets out the expected flows of cash into and out of the business for each month. 

To prepare a cash flow forecast businesses need to estimate all the money coming into and out of the business, month by month. These flows of money are then set onto a grid showing the cash movements in each month. 

Cash in

• In a start up, a business will recieve an injection of capital.
• The business will start the next month and will only recieve cash when sales start.
• Cash inflows are expected to increase each month.
• It is important that the income from sales is shown when the cash is recieved not when the sale is made.

Outflow

• When these figures have been entered onto the grid the total expenditure can be calculated.

Cash flow

Monthly balance: This is the cash inflow for the month minus cash outflow. It shows each month if there is a positive or a negative movement of cash. When outflow is greater than inflow, the monthly balance will be negative. This is shown in the brackets to indicate that it is a minus figure. 

Opening and closing balance: Like a bank statement. It shows what cash the business has at the beginning of the onth and what the cash position is at the end of the month. The closing balance is the opening balance plus the monthly balance. For example, the business starts with £3000 in the bank in April; a net £8500 flows out during the month, so the closing bank balance is (£5500).

The closing balance shows the overall state of the bank account at the end of the month.

As there is no such thing as negative money te cash flow forecast shows that action is needed to avoid promblems in the early months. The easiest remedy would be to neotiate a bank overdraft. 

There are three main ways to analyse a cash flow forecast:

• Calculate the difference between the closing balance at the end of the period and the opening balance at the start. This gives a sense of what is happening over time. If the overall cash balances are building up, then cash inflows are greater than cash outflows and the situation is comfortable. If the balance is declining, urgent action may be necessary, 
• Use the monthly closing balance to assess trends in the data. This helps highlight potential cash flow problems. 
• Analyse the timings of cash inflows and outflows. Although some firms sell goods for cash, most provide customers with interest-free credit. So any methos of speeding up customer payments can boost a firm's cash flow. The sum of money outstanding from customers is known as 'recievables'. Logically, firms should want this figure to be as known as 'payables'.

Firms not only have customers, they also have suppliers. When buying goods on the credit, the longer the credit period you can negotiate from suppliers, the longer your cash will be sitting in your bank account. As it sits in your bank account, this money owed is known as 'payables'. 

For established, large businesses with many different products and numerous customers, cash flow is rarely an important issue. Many senior managers many never have heard the term mentioned in the workplace. The focus is much more on profits and profit margins.

For smaller firms, cash flow may be a daily concern, for example, will we have enough in the bank to pay this Friday's wage bill? This illustrates the first cash flow target for a small business: enough cash to meet all the expected bills in the coming months - with a bit to spare.

When small firms are growing, though, the objectives may become far more ambitions. Having opened a very successful tapas resturant, it took the owners five years to identify the right premises for their second outlet. 

A business can improve its cash flow in several ways:

• Getting goods to the market in the shortest possible time; the sooner goods reach the customer, the sooner payment is recieved. Production and distribution should be as efficient as possible. 
• Getting paid as quickly as possible; the ideal arrangement is to get paid cash on delivery. Most business, though, works on credit. Even worse, it is interest-free credit, so the customer has little incentive to pay up quickly. Early payment should be encouraged by offering incentives such as discounts for early payment.
• Debt factoring
• Keeping stocks of raw materials to a minumum. Good stock management such as a just-in-time system means that the business is not paying for stocks before it needs them for production.

Cash flow can also be improved by keeping cash in the business. Minimising short-term spending on new equipment keeps cash in the business. Things that the business can do include:

• Lease rather than buy equipment. This increases expenses but converses capital.
• Renting ratjer than buying buildings. This also allows capital to remain in the business. 
• Postponing expenditure, for example on new company cars.