Cash Flow

Cash Flow The sum of cash payments (inflows) to a business less the sum of cash payments (outflows). Is Cash flow important to a business? - Yes, because it is the finance available to pay all the day to day expenses of a business, if the business doesn't have enough cash they could be forced into liquidation.

Cash Vs Profit Cash is the amount received into the bank account, where as your profit includes all revenue and expenses regardless off whether you have received or given payment. EG – Andrew Buys stock for $3000 paying in cash and sells them on credit for $7000 and wont receive payment for 2 months.

Cash Flow EG – Andrew Buys stock for $3000 paying in cash and sells them on credit for $7000 and wont receive payment for 2 months. What Profit did he receive? $4000 revenue has been recorded increasing profit. What was his cash flow position? Negative outflow of $3000, this could mean he will be short of cash to pay day to day running expenses.

Forecasting Cash Flow This is usually done on a month by month basis and will start with cash inflow forecasting. Cash Inflows Owners own cash(capital) injection Bank Loan payments Customers Cash Purchases Debtor payments

Forecasting Cash Flows Cash Outflows Lease Payments for premises Rent Payments Other expenses (electricity, water, telephone etc) Wages/Salaries Variable costs like cleaning materials, credit offered by suppliers.

Forecasting is it useful If your forecast is accurate you can plan more effectively for times where you will have negative cash flow, and put plans in place to get an overdraft or a loan.

Limitations Remember the business environment is dynamic and changes at a rapid pace so being accurate can be difficult. Mistakes can be made by inexperienced staff or over estimations. (prudence is paramount) Unexpected cost increaes can throw it out i.e. Transport. Lack of market research can lead to over or underestimation of sales.

Causes of Cash Flow problems Lack of Planning – without a forecast your business could quickly get into trouble. Poor Credit control – not receiving payment because of poor procedures with customers could increase bad debts. Allowing customers too long to pay Expanding too quickly – paying the increased costs of expansion can lead to cash flow shortages.

Causes of Cash Flow problems Unexpected Events – Unforeseen events such as a dip in demand or the fixing of an asset could lead to cash flow problems.

Activity

Increasing Cash Flows How could you increase cash flow? - Bank Overdraft - Short term Loan - Sell Assets - Sale and Lease Back - Reduce credit terms - Debt Factoring

Reducing Cash outflows How could we reduce cash outflows? - Delay payments to suppliers - Delay spending on capital equipment - Lease instead of buy - Cut spending ie advertising

Working Capital Working Capital is Current Assets (Bank, Debtors, Inventory) minus Current Liabilities (Creditors, short term loan). We need to manage our working capital to ensure we can always meet our current obligations.

Working Capital Debtors - Not extending credit to customers – risky business especially if your competitors are doing it. - Credit Checking - Discount for prompt payment.

Working Capital Credit - Increasing the range of goods you buy on credit. - Extend your period of time taken to pay. Inventory - Smaller Inventory levels - JIT inventory handling - efficient inventory control - Increase technology

Working Capital Cash - Cash flow forecasts - Wise use of excess cash - planning for periods of insufficient cash Evaluation – The type of business will impact how much working capital you will need to run your business. Remember that the efficient running of all business departments will help increase cash flows.