Cash Flow

• What is cashflow

  What is it? its a document showing the predicted flow of cash into and out of a business over a period of time, usually 12 months
• Why is cashflow forecasting important? Cash flow forecasting allows businesses to ensure they have a healthy cash balance so they can meet their financial commitments. It enables them to identify any possible shortfalls and make plans to prevent this causing problems for the business.
• Inflows Cash inflows include: cash sales, credit sales, loans, capital, sale of assets, bank interest received
• Outflows Cash outflows include: cash purchases, credit purchases, purchase of assets, VAT, general expenses and bills, rent/rates, salaries, wages etc
• Net Cash Flow The difference between Cash Inflows and Cash outflows (Inflows – Outflows)
• Opening Balance The amount of cash expected to be in the bank at the start of the month
• Closing Balance The amount of cash expected to be in the bank at the end of the month
• Liquidity How able the business is to meet its short term cash payments
• Insolvent When a firm is unable to meet its short term cash payments
• Problems within the cash flow forecast

  Problems occur for businesses when their outflows are greater than inflows. If this occurs frequently the business will run out of cash and fail to meet its short term and long term liabilities and become insolvent.Many businesses have irregular or fluctuating cash flows which vary throughout the year. It is important for businesses to prepare for periods when their inflows may fall or costs rise. A good example is seasonal business like tourism, when businesses need to make enough money in touristy periods to cover their expenses for the whole year.
• Solutions

  Overdraft arrangements • By arranging an overdraft with the bank businesses may be able to use bank funds to help meet their short term needs, when they are short of cash.
• Solutions:


  Negotiate with creditors • When businesses owe creditors money they normally have to pay them back within 30 days. They may be able to negotiate longer credit periods, giving them longer to pay the money back.
• Solutions:


  Review/reschedule capital expenditure • The business may have items of expenditure they are committed to buying. They may need to review these outgoings, find cheaper alternative or even cancel these purchases/expenditures altogether
• ADVANTAGES:

  * Encourages planning for cash inflows and outflows

  * Can be used as part of a business plan to help raise finance

  * Enables cash flow to be monitored and corrective action taken if necessary

  * Encourages planning for cash inflows and outflows
• DISADVANTAGES:

  *Time taken to produce a cash flow forecast could have been spent on other tasks

  *Cannot plan for unexpected events such as a rise in the cost of raw materials

  *Time taken to produce a cash flow forecast could have been spent on other tasks
• Cash Flow Forecasts


  A document showing the predicted flow of cash into and out of a business over a period of time, usually 12 months
• Cash Flow Forecasts


  • Allows businesses to ensure they have a healthy cash balance so they can meet their financial commitments
  • Enables them to identify any possible shortfalls and make plans to prevent this causing problems for the business
• Cash inflows


  • Cash sales
  • Credit sales
  • Loans
  • Capital
  • Sale of assets
  • Bank interest received
• Cash outflows


  • Cash purchases
  • Credit purchases
  • Purchase of assets
  • VAT
  • General expenses and bills
  • Rent/rates
  • Salaries
  • Wages
• Net Cash Flow


  The difference between Cash Inflows and Cash outflows (Inflows - Outflows)
• Problems within the cash flow forecast

  Problems occur for businesses when their outflows are greater than inflows. If this occurs frequently the business will run out of cash and fail to meet its short term and long term liabilities and become insolvent.

  Many businesses have irregular or fluctuating cash flows which vary throughout the year. It is important for businesses to prepare for periods when their inflows may fall or costs rise. A good example is seasonal business like tourism, when businesses need to make enough money in touristy periods to cover their expenses for the whole year.
• Opening Balance


  The amount of cash expected to be in the bank at the start of the month
• Closing Balance


  The amount of cash expected to be in the bank at the end of the month
• Liquidity


  How able the business is to meet its short term cash payments
• Insolvent


  When a firm is unable to meet its short term cash payments
• Cash flow solutions


  1. Overdraft arrangements

  2. Negotiate with creditors

  3. Review/reschedule capital expenditure
• Overdraft arrangements


  Businesses may be able to use bank funds to help meet their short term needs, when they are short of cash
• Negotiate with creditors


  Businesses owe creditors money and normally have to pay them back within 30 days. They may be able to negotiate longer credit periods, giving them longer to pay the money back
• Review/reschedule capital expenditure


  The business may have items of expenditure they are committed to buying. They may need to review these outgoings, find cheaper alternative or even cancel these purchases/expenditures altogether
• Opening Balance plus inflows minus outflows=Closing Balance