Cashflow forecasting and working capital
What is meant by cash inflows
5 common ways this happens
Debt payments
Borrowing money
Selling stuff
Selling assets
investors
5 common cash outflows
Purchasing goods/materials
Wages, salaries, other expenses
Purchasing assets
Repaying loans
Paying creditors
Cash flow cycle
problem example
Not enough money at stage one: not enough materials bought so sales will fall
Insufficient cash to pay bills: liquidity crisis (maybe forced out of business)
Business insisting costumers paying cash at stage 4: losing costumers to competitor offering credit
What cash flow is not
Cashflow isn’t profit
Can profitable businesses run ou of cash
Yes
Major reason for businesses failing
Called insolvency
possible by
Buying too many assets
Expanding too quickly
Too long of a credit period
High inventory level (overtrading)
The importance of cashflow forecasts
Can be used to tell
How much the business needs from the bank
Business holding too much cash (other forms such as non-current assets)
How much is available to pay the bills, repay loans or buy assets
Uses of cash flow forecasts
Starting up a business
Expensive time
Business premises, machinery, inventory, advertising, etc
How much cash needed first few months of operation
Keeping the bank manager informed
for them to lend money they need to see forecast
how much loan or overdraft, how longl, when its repaid
managing an existing business
any business can run out of cash
expensive non-current assets or fall in sales
borrowing money better planned in advanced (less interest)
bank refusing loan needed tomorrow
poor business planning
little other alternatives
business exceeding overdraft limit
bank insists business pays immediately
business has to close
managing cash flow
too much cash in bank could be used in other areas
paying off loans to reduce interest charge
pay creditors (possible discount)
long term cash flow decisions
cutting costs; increasing efficiency
new products (attract more costumers)
attracting new investors
might affect ownership
employees may not like it
product quality may go down
could take a long time
cash needed
Concept and importance of working capital
capital readily available to the business
working capital = current assets - current liabilities
its the lifeblood and having enough helps with credit reputation
can run effectively without enough of it
held in different forms
value of inventory
value of firm's debtors
cash
related to volume of production and sales
additional credit facilities may be needed
Definitions
cash flow forecast
net cash flow
liquidity
credit sales
how early an asset can be converted into cash without affecting market price
the difference, each month,
between inflows and outflows
estimate of future cash inflows and outflows of a business
sales that are payed for in credit, and cash will be received later on
no sufficient cash = no pay bills/loans = bankrupt
Extras in checklist (not in TB)
length of cash flow cycle
improving working capital
finance short term cash shortage
trade credit
commercial bank loans
commercial paper
secured loans
inventory management
managing expenses
penalty for late payments
how fast the business receives payment
what type of goods to they produce
how fast their goods are sold
how much and how big are the expenses