CASH FLOW PLANNING UNIT 8

THIS UNIT WILL EXPLAIN THE IMPORTANCE OF CASH FLOW TO BUSINESS OPERATIONS HOW FIRMS CAN RUN SHORT OF CASH AND THE LIKELY CONSEQUENCES OF THIS HOW A CASH FLOW FORECAST IS CONSTRUCTED

WHAT IS MEANT BY CASH FLOW CASH IS A LIQUID ASSET. THIS MEANS THAT IT IS IMMEDIATELY AVAILABLE TO BE SPENT ON GOODS AND SERVICES ANY TIME. MANY BUSINESS EXPERIENCE CASH FLOW PROBLEMS, MEANING THAT THEY DO NOT HAVE ENOUGH CASH TO DO WHAT THEY WANT TO DO. CASH FLOW MEANS "THE FLOW OF MONEY IN AND OUT OF A BUSINESS". THESE ARE WAYS CASH FLOW CAN OCCUR:

WHAT IS MEANT BY CASH FLOW THESE ARE THE WAYS CASH FLOW CAN OCCUR: CASH INFLOWS: SALE OF GOODS FOR CASH. PAYMENT FROM DEBTORS. BORROWING FROM A SOURCE (BUT WILL INEVITABLY LEAD TO CASH OUTFLOW IN THE FUTURE). SALE OF UNWANTED ASSETS. INVESTMENT FROM INVESTORS: SHAREHOLDERS AND OWNERS CASH OUTFLOWS: PURCHASING GOODS FOR CASH. PAYMENT OF WAGES, SALARIES AND OTHERS IN CASH. PURCHASING FIXED ASSETS. REPAYING LOANS. REPAYING CREDITORS.

WHAT IS MEANT BY CASH FLOW ACTIVITY 8.1: CASE STUDY TASK. TransactionCash InflowCash Outflow Purchase of new computer for cash X Sale of goods to customers – no credit given X Interest paid on a bank loanX Wages paid to staffX Debtors pay their billsX Additional shares are sold to shareholders X Creditors are paidX Bank overdraft is paid offX

CASH FLOW CYCLE A CASH FLOW CYCLE SHOWS THE STAGES BETWEEN PAYING OUT CASH FOR LABOR, MATERIALS, ETC. AND RECEIVING CASH FROM THE SALE OF GOODS. 1.Cash need to pay for 2.materials, wages, rent,etc 3.Goods produced 4Goods sold 5.Cash payment received for goods sold

CASH FLOW CYCLE THE LONGER IT TAKES FOR CASH TO GET BACK TO THE BUSINESS, THE MORE THE BUSINESS WILL NEED WORKING CAPITAL AND CASH. THIS CYCLE ALSO HELPS US UNDERSTAND THE IMPORTANCE OF CASH FLOW PLANNING. THIS IS WHAT HAPPENS WHEN A COMPANY IS SHORT ON CASH:

CASH FLOW CYCLE NOT ENOUGH TO PAY FOR MATERIALS -> OUTPUT AND SALES WILL FALL. THE COMPANY WILL WANT TO INSIST CUSTOMERS ON PAYING IN CASH, BUT THEY MIGHT LOSE THEM TO COMPETITORS WHO LET THEM PAY IN CREDIT. THERE COULD BE A LIQUIDITY CRISIS WHEN IT DOES NOT HAVE ENOUGH CASH TO PAY FOR OVERHEADS (BILLS, RENT, ETC.) AND THE BUSINESS MIGHT BE FORCED TO CLOSE DOWN BY ITS CREDITORS. MANAGERS NEED TO PLAN THEIR CASH FLOW SO THAT THEY DO NOT END UP IN THESE POSITIONS.

WHAT CASH FLOW IS NOT! CASH FLOW IS NOT THE SAME AS PROFIT. WHAT WAS THE GROSS PROFIT? SALES REVENUE – COST OF GOODS SOLD = $25,000 Goods sold to Customers $40,00050% cash,50% one month credit Costs of goods sold$15,000Paid for in cash

WHAT CASH FLOW IS NOT! ASSUMING THE BUSINESS STARTED THE MONTH WITH NO CASH, HOW MUCH CASH DID IT HAVE AT THE END OF THE MONTH. CASH INFLOW – CASH OUTFLOW $20,000 (CASH SALES) - $15,000 = $5,000 Goods sold to Customers $40,00050% cash,50% one month credit Costs of goods sold$15,000Paid for in cash

CASH FLOW PROBLEMS HAVING A POSITIVE CASH FLOW IS VITAL FOR THE SURVIVAL OF A BUSINESS, SINCE WITHOUT THE ABILITY TO PAY WORKERS AND SUPPLIERS THEN THE BUSINESS WILL SOON HAVE TO CEASE TRADING. A PROFITABLE BUSINESS RUNNING OUT OF CASH = INSOLVENCY THIS POTENTIAL PROBLEM IS COMPOUNDED BY THE FACT THAT BUSINESSES OFTEN HAVE TO PAY MANY EXPENSES SEVERAL WEEKS OR EVEN MONTHS BEFORE ANY CASH ACTUALLY FLOWS INTO THE BUSINESS.

CASH FLOW PROBLEMS THE MAJOR CAUSES OF CASH FLOW CRISES FOR A BUSINESS ARE: OVERTRADING -WHERE THE BUSINESS ATTEMPTS TO EXPAND TOO RAPIDLY, WITHOUT A SUFFICIENT FINANCIAL BASE. HAVING TOO MUCH MONEY INVESTED IN STOCKS. ALLOWING TOO MUCH CREDIT TO THEIR CUSTOMERS. UNEXPECTED CHANGES IN DEMAND FOR THEIR PRODUCTS. OVER BORROWING -THEREFORE HAVING LARGE MONTHLY LOAN REPAYMENTS, WHICH HAVE TO BE MET.