Understanding Cash Flow Projections Mona El-Chami, Senior Financial Management Specialist World Bank November 2013 Tripoli, Libya

Why Money is so important? Almost 2/3 of all small businesses experience money problems continuing problem – 1/5 of small business managers reported that cash flow is a continuing problem Differences are important Differences are important – Represents the lifeblood of the business, and knowing how to use it can make the difference between boom and bankruptcy Importance of Money

Percentage of Small Businesses that Experience Cash Shortages 1

The Cash-to-Cash Cycle

cash-to-cash cycle The cash-to-cash cycle of a pushcart vendor is only a few hours; construction projects may take years to complete Many small businesses experience difficulty because: receiving and spending cash – The mismatch in time between receiving and spending cash size of payments received and size of payments to be made – Mismatch in time between size of payments received and size of payments to be made The Cash-to-Cash Cycle

Managing Cash Flow three sources Cash can come from only three sources: selling – Cash can be obtained by selling products and services investments – Cash can be obtained from investments the business has made financing (Grants and Loans) – Cash through financing (Grants and Loans)

How to Better Manage Your Cash Flow Measuring cash flow – Prepare cash flow projections for next year, next quarter and, if you're on shaky ground, next week – accurate cash flow projection can alert you to trouble well before it strikes Managing Payables Surviving shortfalls

Using a cashflow forecast/Projection

Project Cash Flows The definition, identification, and measurement of cash flows relevant to project evaluation. 9

What is ‘cashflow’? The flows of money into and out of the business Money flows in through revenue sales of service or product (in our case, cash received from the WB) Money flows out when wages and expenses are paid or assets are purchased.

Managing Your Cash Flow Cash-flow forecast will help you predict the amount of money that will be coming into and flowing out of your business Take these steps to ensure your business will maintain its positive cash flow – Know what to expect – Predict and plan for the slow times – Make projections for the future

The principle of “cashflow” More money IN than OUT = cash flow positive. BUT high surplus of cash should be avoided in non-interest bearing account) More money OUT than IN = cash flow negative. Can mean shortage of cash to pay invoices The aim is to have a positive cash flow or at least a balance.

The principle of cashflow Cash too high Cash OK Cash too low Revenue in Expenses out

Inflows Inflows = money received from Customers (NA) Local and national government Sale of property or equipment (NA) Loans/Grants

Outflows Outflows = money spent by the business on Wages and salaries for staff Contracts (Construction & Consultants) Gas, electricity, water and telephone Rent and business rates Interest on loans Equipment purchases

Forecasting cash disbursements Forecasting cash disbursements : – Estimates of expenses – Knowledge of your business’s payment patterns – Predict how much and when cash should be paid out – Need to know how much money we will have on the first day of the year to put together a cash budget for the first quarter

A basic cash flow diagram Jan USD Feb USD Mar USD Apr USD May USD June USD Opening balance 5,000 7,000 4,000 6,00012,00015,000 Add inflows 20,00022,00018,00020,00023,00018,000 Total25,00029,00022,00026,00035,00033,000 Less outflows 18,00025,00016,00014,00020,00033,000 Closing balance 7,000 4,000 6,00012,00015,000 0

Several strategies that will provide savings in cash outflows: – Control of the timing of paying out cash – Timing of purchases – Negotiation of terms with suppliers – Use of temporary agencies – Non-cash employee incentives

Techniques to decrease cash outflows: – Two factors – Two factors of cash outflows that must be controlled: The amount of cash being paid out The timing of cash being paid out – Waste – Waste also affects cash outflow

In Review Managing cash flows is the most important and most difficult task faced by managers Revenue (cash to be received) and expenses are used to predict the amounts and timings of cash outflows primarily through the budgeting process

Thank You! Q&A For any further question or follow up, you can contact me at