Please enable JavaScript.
Coggle requires JavaScript to display documents.
Unit 31: Forecasting and managing cash flows - Coggle Diagram
Unit 31: Forecasting and managing cash flows
Key terms
Liquidation
when a firm ceases trading and its assets are
sold for cash to pay suppliers and other creditors.
Insolvent
when a business cannot meet its short-term
debts.
Cash flow
the sum of cash payments to a business
(inflows) less the sum of cash payments (outflows).
Ways to reduce cash outflows
Cut overhead spending that does not directly affect output
Use leasing, not outright purchase, of capital equipment
Delay spending on capital equipment
Delay payments to suppliers
Cash inflows and outflows
Cash inflows
payments in cash received by a business, such as those from customers (trade receivables) or from the bank, e.g. receiving a loan.
Cash outflows
payments in cash made by a business,
such as those to suppliers and workers.
Forecasting cash inflows
Bank loan payment
Customers' cash purchases
Owner's capital injection
Trade receivables payments
Forecasting cash outflows
Electricity, gas, water and telephone bills
Labour-cost payments
Annual rent payment
Variable cost payments
Lease payment for premises
Structure of cash flow forecasts
Cash outflows
This section records the cash payments made by the business, including wages, materials rent and other costs.
Cash inflows
This section records the cash payments to the business, including cash sales, payments for credit sales and capital inflows.
Net monthly cash flow and opening and closing
balance
This shows the net cash flow for the period and the
cash balances at the start and end of the period
Limitations of cash-flow forecasts
Unexpected cost increases
Wrong assumptions can be made in estimating the sales of
the business
Mistakes can be made in preparing the revenue and cost forecasts or they may be drawn up by inexperienced entrepreneurs or staff
The causes of cash-flow problems
Allowing customers too long to pay debts
Poor credit control
Expanding too rapidly
Unexpected events
Lack of planning
Ways to increase cash inflows
Sale of assets
Sale and leaseback
Short-term loan
Reduce credit terms to customers
Overdraft
Debt factoring
Working capital
Too little liquidity can lead to business failure
The timings of cash received and spent are
important + efficient operations management and efficient marketing
Too much liquidity is wasteful
Business requirements for working capital will depend on a number of factors, especially the length of the working capital cycle.
Trade payables
Increasing the range of goods and services bought on credit
Extend the period of time taken to pay
Cash
planning for periods when there might be too little cash and
arranging for overdraft facilities
wise use or investment of excess cash
can be managed by: use of cash-flow forecasts
Trade receivables
Selling claims on trade receivables to specialist financial institutions acting as debt factors
By being careful to discover whether new customers are
creditworthy
Not extending credit to customers – or extending it for shorter time periods
By offering a discount to clients who pay promptly
Inventory
efficient inventory control, inventory use and inventory handling
just-in-time inventory ordering
using computer systems to record sales
keeping smaller inventory levels