5.2 – Cash Flow Forecasting and Working Capital
Cards (16)
- Cash flow: the cash inflows and outflows over period of time
- Cash inflows: the sums of money received by a business during a period of time
- Cash outflows: the sums of money paid out by a business during a period of time
- Cash flow cycle: this shows the stage between paying out cash and receiving cash
- Cash flow forecast: an estimate of future cash inflows and outflows of a business, usually on a month-by-month basis.
- Net cash flow: the difference, each month, between inflows and outflows
- Closing cash balance: the amount of cash held by the business at the end of each month (becomes next month's opening cash balance)
- Opening cash balance: the amount of cash held by the business at the start of the month.
- Working capital: the capital available to a business in the short term to pay for day-to-day expenses.
- Cash inflows are from:
- sale of products
- sale of assets
- borrowed money, e.g. loans or overdraft
- investors' money
- Cash outflows are used:
- purchasing goods/components/ raw materials using cash
- paying bills, e.g. wages
- purchasing non-current assets
- repaying loans
- paying creditors/accounts payable
- Cash flow problems:
- too little cash - cannot pay bills and workers
- production will stop
- forced into liquidation
- Cash flow forecasts are used:
- when starting a new business
- to obtain a bank loan
- to manage cash flow to avoid running out of cash
- to reduce need for an overdraft
- to help managers plan ahead
- Long-term solutions to cash flow problems:
- attract new investors
- cut costs
- increase efficiency
- develop new products to attract more sales
- find ways to increase revenue (in short term may increase costs)
- Short-term solutions to cash flow problems:
- delay payments to suppliers
- ask debtors/accounts receivable to pay more quickly
- delay or cancel payment of capital equipment
- take out a bank loan/overdraft
- Net Cash Flow = Total Cash Inflow – Total Cash Outflow