cashflow forecasting

• Whys Cashflow important

  • Cash flow is a dynamic and unpredictable part of life for most businesses (particularly start-ups and small businesses)

  • Cash flow problems are the main reason why a business fails

  • Regular and reliable cash flow forecasting can address many of the problems
• Main Cash Inflows

  Cash sales

  Receipts from trade debtors

  Sale of fixed assets

  Interest on bank balances

  Grants

  Loans from bank

  Share capital invested
• Cash Outflows

  Payments to suppliers

  Wages and salaries

  Payments for fixed assets

  Tax on profits

  Interest on loans & overdrafts

  Dividends paid to shareholders

  Repayment of loans
• Key points for cashflow forecast

  • A forecast is normally produced by month

  • Net cash flow is the difference each month between cash inflows and cash outflows

  • Opening balance is the amount the business starts with each month

  • Closing balance = opening balance + net cash flow

  • Negative closing balance suggests business needs bank overdraft or additional financing
• Common Issues with Cash Flow Forecasts

  • Sales prove lower than expected

  • Customers do not pay up on time

  • Costs prove higher than expected
• Cash Flow Problems

  Low profits or (worse) losses

  Too much production capacity

  Excess inventories held

  Allowing customers too much credit & too long to pay

  Overtrading – growing the business too fast

  Seasonal demand
• How to manage cashflow problems

  • Regular and reliable cash flow forecasting

  • Managing working capital

  • Having sufficient and suitable sources of finance
• Improving Cash Flow from Debtors

  Effective Credit control

  • Policies on how much credit to give and repayment terms and conditions

  • Measures to control doubtful debtors

  • Credit checking Offer cash discounts for prompt payment Improve record keeping – e.g. accurate and timely invoicing

  Potentially use debt factoring
• What is debt factoring ?

  • The selling of debtors (money owned to the business) to a third party • This generates cash

  • It guarantees the firm a percentage of money owed to it

  • But will reduce income and profit margin made on sales

  • Cost involved in factoring can be high
• Improving Cash Flow from Creditors

  • Trade credit - amounts owed to suppliers for goods supplied on credit and not yet paid for

  • Delayed payment means that a business retains cash longer

  • But - have to be careful not to damage firm’s credit reputation and rating

  • Trade creditors are seen (wrongly) as a “free” source of capital

  • Some firms habitually delay payment to creditors in order to enhance their cash flow - a short-sighted policy and raises ethical issues
• Improving Cash Flow from Inventory (Stocks)

  • Inventory refers to goods purchased and awaiting use or produced and awaiting sale

  • Inventories take the form of raw materials, work-in-progress and finished goods

  • Stockholding is costly and therefore it is sound business to: - keep smaller balances (just in time stocks) - computerise ordering to improve efficiency o improve stock control

  • This will cut down the spending on stock but may leave the business vulnerable to stock outs