Forecasting and managing cash flows

  • Created by: Jeon32666
  • Created on: 13-03-19 06:31

Purposes of cash flow forecasts

Difference between cash and profits

  • Cash is the actual cash inflow and outflow of a business, whereas, profit consists of all the anticipated incomes and expenses of a business
  • For example:I have bought a sapphire ring by cash at $2000 and sold it on credit for $2500.thus, my profit will be $500. But my net cash flow in the business would be -$2000. It is because I havent yet received the money from selling.

IF a business runs out of cash, it might get into huge troubles, for instance, it might not be able to repay its short term debts and it may suffer from liquidation

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Cash flow forecasts in practice

  • Cash flow forecasts can help the business tackle any problem arising from a lack of cash. Such as, arranging a bank overdraft or preparing to inject more owner's capital.
  • Plans can be made for reducing highly negative cash flows
  • A new business planning will never progress beyond the initial planning stage unless investors and bankers have access to cash flow forecasts

Structure of cash flow forecasts

  • SECTION 1: cash inflows
  • SECTION 2: cash outflows
  • SECTION3: Net monthly cash flow and opening and closing balance
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Cash flow forecasts in practice pt II

Forecasting cash inflows

  • Owners own capital injection
  • Bank loan payments
  • Customers' cash purchases-----It will highly depend on the sales forecasts and its accuracy
  • Trade receivables payments-----Difficult to forecast

Forecasting cash outflows

  • Lease payments for premises
  • Annual rent payment
  • Labour costs----these forecasts will largely base on demand forecasts
  • Utility bills------will vary on many factors
  • Variable cost payments
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Limitations of cash flow forecasts

  • Unexpected cost increases will lead to an inaccurate cash flow forecasts
  • Wrong assumptions can be amde in estimating the sales of the business, perhaps, based on poor market research
  • Mistakes can be made in preparing the revenue and cost forecasts
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Methods of improving cash flow

Methods of improving cash inflow

  • Overdraft
  • Short term loan
  • Sale of assets
  • Sale and leaseback
  • Debt factoring
  • Reduce credit terms to customers

Methods of reducing cash outflow

  • Delay payments to suppliers
  • Delay spending on capital equipment
  • Cut overhead costs
  • Use leasing rather than outright purchase of the capital equipment
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How to manage debtors and creditors to improve cas

How to manage trade receivables:

  • Not extending credit periods to customers
  • Debt factoring
  • Paying discounts to clients who pay promptly

How to manage trade payables

  • Increasing the range of goods and services bought on credit
  • Extend the period of time taken to pay
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