Cash Flow And CF Forecasts Flashcards
Importance of can flow :
Gives immediate spending power ie supply of read money.
Pay essential debt immediately
Provide a good reputation with suppliers
No need to borrow money.
Difference between cash and profit :
Cash is the amount of actual money that flows in and out of a firm.
Profit is the excess of revenue over expenditure calculated, according to the accepted accounting concepts and conventions, over a specific period of time. Some revenue isn’t cash because some sales are made on credit and some expenditure hasn’t actually been paid.
Profit : equation
Profit = revenue - expenses
Cash flow : equation
Cash flow = inflows - outflows
Cash flow : definition
Refers to the cash that comes into and goes out of the business over a period of time ie it’s the change in cash position of a business over time.
Cash is important short term to keep the business running .
Liquidation : definition
Turning assets into cash and may be insisted on courts if suppliers have not been paid.
Insolvent : definition
When a business cannot meet its short term debts.
How to control cash flow :
Review current cash position
Review future cash management in terms of cash flows in/out, receipts due, payments due
Arrange for measures to correct cash flows such as bank overdrafts
Compare actually situation with forecast.
Causes of cash flow problems :
Low profits or losses Over investment in capacity ie too much in stock Allowing too much credit Growing too fast Seasonal demand
Methods of improving cash flow : increase in flows
Overdraft : arrange a flexible loan : high rate of interest
Short term loan : fixed amount borrowed : repay by due date
Sales of assets : sell off redundant assets : could be used infuture
Sale and leaseback : sell asset and still use : add to annual overhead
Reduce credit : cash flow brought forward : may need long credit
Debt factoring : bills bought and cash offered :
Ways to improve cash flow : reduce outflows
Delay payments to supplier : outflows will fall in short term : supplier can refuse or reduce discount
Delay spending on capital : cash paid later :
Leasing : use but no large spend : lease company owns
Cut overhead spend : cash payment reduced : future demand may reduce.
What is in a cash flow forecast : 5
Inflows = money coming in
Outflows = money coming out
Net cash flow = inflows - outflows
Opening balance = money carried from previous month
Closing balance = net cash flow + opening balance
Why businesses forecast their cash flow :
They enable it to foresee times in the future when the business will be short of liquidity. If shortages are anticipated far enough in advance, the business may be able to take measures to prevent shortage.
Main reasons to forecast
Identify potential cash flow problems in advance
To guide firm toward appropriate action
Ensure sufficient cash available to pay suppliers etc
Provide evidence to request financial assistance
To avoid being forced out of business bc of shortage of money.
Identify possibility of holding too much cash
Problems with cash flow forecasting :
Changes in the economy ie cannot predict what will happen Changes in consumer taste In accurate market erase arch Competition is unpredictable Uncertainty (especially if new business)
