cash flow + budget

• cash flow

  all money that comes in and out of a business
• generation of cash

  through the sale of goods or provision of a service
• importance of cash

  pay employees, buy supplies, cover business expenses (heating, electricity, stockholding)
• cause of cash flow problem

  low sales, too much money in stock, delayed payment from customers, suppliers not allowing credit or a limited credit period, owner taking too much drawings, overinvestment in new assets, increase in expenses
• cash flow problem worst impact

  company may go into liquidation
• liquidation

  company is unable to trade
• cash flow problem

  too much expenditure and not enough income
• cash budget

  document showing opening balance, receipts, payments, closing balance
• opening balance

  amount of money available at the beginning of the month, equivalent to closing balance from the last month
• receipts

  list of all money coming into the business, income
• payments

  list of all money expected to come out of the business, expenditure
• closing balance

  cash left at the end of the month after all payments have been taken away from the business receipts and added back to the opening balance
• net cash flow

  (receipts) - (payments), if it is a negative number then there is a cash flow problem
• impact of cash flow problems

  unable to pay suppliers so stock is not delivered and production stops, might switch to cheaper supplier which reduces quality, unable to pay expenses, may need to sell unused assets or make staff redundant, no money to invest in future growth, may have to borrow more which lead to more interest on borrowed funds, may offer discounts to increase sales
• solving cash flow problems

  find cheaper supplier, lease machinery or equipment, sell unused assets or ineffectively used assets, apply for loan or overdraft, offer discounts to customers paying upfront or quickly, increase credit terms, increase advertisement or sales promotion
• increasing credit terms

  arranging extra time to pay bills from supplier
• advantages of cash budget

  identifies times where there are a shortage of cash which allows the business to plan ahead and arrange extra funding such as bank overdraft, regulates expenses as months where there are high expenditure is highlighted, shows surplus and deficit cash allowing a business to plan more effectively, can be shown to potential lenders or investors to secure investments, can be used to set targets or budgets for individual departments which motivate employees to achieve goals