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Cash flow forecasting and working capital - Coggle Diagram
Cash flow forecasting and working capital
Cash flow and forecasting
Definition and importance.
Describe the money that they have available to plan the day-to-day running.
Without sufficient cash, a business cannot pay its bills (and long-term businesses fail).
Cash inflows
Money coming into the business can come from different sources and can be used for different reasons.
Cash outflows
Money going out of the business to pay for bills, supplies or loans repayments. Is important to forecast to ensure enough cash to cover the cost.
Cash flow forecast
Are financial statements.
Predict future cash to ensure enough cash to cover outflows.
If a business is ignored, result in insolvency.
Benefits
A business can manage its cash so it doesn’t have shortage.
Help to plan for future and predict.
Dealing with cash problems
Problems exist when a business doesn't have enough cash, in the short term to pay outflows.
Solutions
Short-term methods
Ask for trade receivables to pay quickly. Flexible payment attract customers but leave in short-term problems.
Securing bank overdrafts allow to have negative cash balance. Cost, as banks charge interest on overdraft.
Asking for credit on outflows allows the more time to pay expenses.
Bank loans provide large inflow cash, but has to be pay with interests. Use to generate more inflows or reduce outflows.
Long-term methods
Large outflows, business need to ensure inflow to cover costs before the outflow has to be paid.
Businesses need to secure funding before paying the costs.
Businesses can try to increase their inflows or reduce their outflows.
Working capital and liquidity
Capital expenditure
Money obtained for purchasing assets.
Working capital
Is the money available to cover expenses.
Liquidity
Extent to which can be met short-term debts.
Liquid businesses have enough cash to pay their bill on time and clear debts.
Problems
Short-term problems and inability to pay bills.
High level of long-term debt.
Banks are likely to not lend, or change high rate interests as they view a high risk business.
Suppliers and bills aren't paid on time, incurring payment charges and interest on the outstanding amount owned.
Supplier not continue to supply a business if they consider it high risky.
Businesses forced to use long-term to solve short-term cash flow problems.
Result in bigger debt and will delay liquidity problems.
Methods to improve...
Increase inflows into the business.
A business could do this by increasing the selling price or attempting to sell more units.
Control costs.
Cheaper costs help to improve the amount of working capital available.
Ensure trade receivables pay on time.
Wait to receive payment from customers means the business has to wait longer to pay its trade payables.
Avoid any further investment.
Business should use all the money to access to sort out the short-term liquidity problems.