cash flow forecasting Flashcards
what is cash flow
the sum of cash payment to a business less the sum of cash payements from the business
insolvent
when a business cannot meet its short-term debts
cash flow forecast
an estimate of the future cash inflows and outflows of a business
why is it important for new businesses
-banks and other lenders will need to see evidence of a cash flow forecast before giving finance
-new business start-ups are often offered much shorter credit to pay suppliers than larger firms
- helps with planning and foresight since money is tight in the beginning
cash inflows
cash payments into a business
examples of cash inflows
owners own capital injection
-bank loan payments
-customers cash purchases(requires sales forecast)
-trade receivables payments
cash outflows
cash payments out of a business
examples of cash outflows
annual rent payment
-utility bills
-wage payments
-cost of materials
opening cash balance
cash held by a business at the start of the month
closing cash balance
cash held by the business at the end of the month, which becomes next months opening balance
benefits of cash flow forecasting
-the show negative cash flows (plans for addition finance can be made)
-business can plan to improve cash flow by identifying areas of excessive -ve cash flow
-essential for all business plans
limitations of cash flow forecasting
-mistakes can be made in preparing revenue and cos forecasts
-unexpected cos increases leads to inaccuracies
-incorrect assumptions could be made (possibly due to poor market research)
causes of cash flow problems
-lack of planning( can lead to inaccuracies)
-poor credit control (leads to inaccuracies in trade
receivables)
-expanding too rapidly (overtrading)
-unexpected events (cost increase/ breakdowns etc)
-allowing customers to long to pay debts (reduces short-term cash inflows)
credit control
monitoring of debts to ensure that credit epriods are not exceeded
bad debt
unpaid customers bills that are now very unlikely to ever be paid
overtrading
expanding a business rapidly without obtaining all the necessary finance, resulting in a cash flow shortage
methods of increasing cash inflows (disadv- same as sources of finance)
overdraft
-short-term loan
-sale of assets
-sale and leaseback
-manage trade recievables
methods of reducing cash outflows
delay capital expenditure
-use leasing instead of buying
-cut overhead costs that don’t directly affect output (eg. promotional expenditure)
-manage trade payables
how to improve cash inflows with trade receivables
-not extending credit to customers or asking them to pay more quickly (may decrease customers)
-selling trade receivables to debt factors (take a portion)
-finding out whether new customers are creditworthy (use banks, other traders to find out)
-offering a discount to customers who pay promptly (reduce profit margin)
what is delaying capital expenditure + drawbacks
by not buying equipment, vehicles cash won’t have to paid to suppliers
-ves: - efficiency may fall if inefficient equipment isn’t replaced
-expansion becomes difficult
what does cutting overheads work + drawbacks
these costs will not reduce production capacity and cash outflows will be reduced.
-ve: -future demand may fall by not promoting the product
improving cash outflows by managing trade payables
-purchasing more supplies on credit (some suppliers may refuse, discounts from suppliers may stop)
-extend the period of time taken to pay (suppliers may be reluctant to supply or offer a good service in the future)
