Cash-flow

• Cash flow forecast: The process of estimating the size and timing of cash inflows and outflows within a business.
• Cadsh flow forecasts shows the predicted net cash flow and opening and closing balance at set points in time, normally monthly.
• Cash inflows are the receipts of cash into a business
• Cash inflows:

  • sale of goods in cash or payments received from debtors
  • loans received
  • capital invested
• Cash outflows are the transfer of cash out of a business.
• Cash outflows:

  • buying materials in cash or paying trade creditiors
  • paying expenses
  • repaying loans and interest payments
  • purchasing capital equipment
• Cash flow is important to a business as it needs to ensure a positive cash balance in order to be able to meet day to day expenses and hence survive.
• Cash flow forecasts is a forward looking statement that tries to predict cash inflows and outlofws in the future.
• Cash inflows: Cash in from sales.
• Cash inflows:

  • cash sales appear in the month of sale
  • cash sales (debetor payments) appear in month of cash receipt
  • cash from other sources (e.g. loans, investments)
• Cash outflows: Cash out for purchases and payments.
• Cash outflows:

  • Cash payments appear in month of purchase
  • credit payments appear in month of cash outflow
• Net cash flow: The net result of cash inflows and cash outflows in each month.
• Net cash flow = cash inflows - cash outflows
• Opening balance: How much the business has at the start of each month.
• The closing balance for one month becomes the opening balance for the next month.
• Closing Balance: How much the business has at the end of each month.
• Closing balance = opening balance + net cash flow
• Factors affecting cash flow:

  • Transcription types - (sales - cash vs. credit) (purchases - cash vs. credit) (payment terms)
  • Timings of cash flows (seasonal sales) (timings of payments in and out)
  • Nature of business (start-up capital and costs) (time taken from input to output) (inventory holdings)
• Cash flow problems occur when businesses fail to have sufficient cash to meet day to day expenses.
• Insufficient liquid cash funds may mean an inability to meet short-term debts.
• Limited cash can result in missed oppertunities.
• A business may improve cash flow by:

  • increasing the volume of cash inflow or speeding up the timing of the cash flow
  • reducing the volume of cash outflow or slowing down the timing of the cash outflow.
• Uses of cash flow: to identify the timing and significance of any potential shortfalls
• Uses of cash flow: to identify possible corrective action
• Uses of cash flow: to help secure finance from potential investors or the bank
• Uses of cash flow: to give confidence about short-term survival
• Uses of cash flow: to provide a guide against which to measure actual cash flow
• Limitations of cash flow forecast: based on predicted future inflows and outflows therefore may be inaccurate
• Limitations of cash flow forecast: informed by market research but this may be small scale, biased or flawed
• Limitations of cash flow forecast: affected by the external environment which is outside of the businesses control like, intrest ratesm new competitiors.
• Limitations of cash flow forecast: demand may be over or underestimated
• A business will analyse the timings of cash inflows and cash outflows. It may then look to change these in order to improve cash flow.
• To improve cash inflows a business may offer a discount for early payments or penalties for late payments.
• Recievables: The money that is owed by customers to a business.
• To slow down cash outflows, a business may negotiate longer payment terms from suppliers.
• Payables: The money a business owes its suppliers.
• Cash is money which exists in a business at a point in time in the form of cash in hand or at the bank, and is avaliable for immediate use.
• Cash is crucial to the short term survival of a business as it allows it to meet day to day expenditure.
• Profit is the surplus money made by a business when total revenue exceeds total costs