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Cash flow forecasting and working capital (Cash flow (Cash inflow…
Cash flow forecasting and working capital
Why cash is important:
An always available liquid asset
Pay workers, suppliers, landlord, government
production of goods and services
Too much debt = liquidation
Cash flow
Cash inflow
Payments by debtors
Borrowing from external sources
Sale of assets
Investors
Sale of products
Cash outflow
Purchasing goods and materials
Paying wages, salaries, expenses, etc.
Purchasing fixed assets
Repaying loans
Paying creditors
Cash flow cycle
Cash needed to pay for costs
Materials, wages, rent, etc.
Goods produced
Goods sold
Cash payment received for goods sold
To avoid:
Not having enough cash to purchase requirements
Insisting to be paid in cash, hence losing to another competitor
A liquidity crisis
Not profit
Insolvency caused by:
Too long a credit period
Purchasing too many fixed assets
Too quick of an expansion and a high inventory level(overtrading)
Cash flow forecasts
Shows manager:
Cash the bank needs to lend to avoid insolvency
Cash available to pay for bills, loans & fixed assets
Extra cash that could be used for profitable uses
Future cash position
Uses
Starting up
Need to know cash needed in first few crucial months of operation
Running existing business
Business can run out of cash anytime
Keeping bank manager informed
Won't lend cause they need to know how big a loan or overdraft, when it's needed, how long it's needed for and when it'll be repaid
Managing cash flow
Too much cash held could be used better in other areas
Overcoming problems
Short term:
Delaying payments to suppliers
Suppliers could refuse to supply/offer lower discounts
Insisting only cash sales - or asking debtors to pay quicker
Inflow increases in short term
Customers may take custom elsewhere that offers longer trade credit
Outflow will decrease in short term
Increasing bank loans
More cash
Delay/cancel purchases of capital
long-term efficiency could decrease w/o up-to-date equipment
Outflow for equipment purchase decreases
Interest must be paid = reduce profits
In the longer term..
Attract new investors
Will affect ownership
Cutting costs & increasing efficiency
Employees may disagree & may affect quality
New products
Needs time and cash
Importance of working capital
Amount of capital available to pay for day-to-day expenses
Represents operating liquidity