Chapter 30: Forecasting and managing cash flows Flashcards
Cash flow
cash payments in - cash payments out
Insolvent
When a business cannot meet its short-term debts
Cash flow forecasts
Estimate of future cash inflows and outflows
Why is a cash flow forecast important to new businesses?
New business start-ups are often given short credit periods
Banks need to see the forecast to make finance available
Accurate planning is significant because of tight finance
Cash inflow
Cash payments into a business
Cash outflow
Cash payments out of a business
Structure of cash flow forecasts
Cash inflows
Cash outflows
Net cash flow
Opening and closing balance
Net cash flow
Estimated difference between cash inflows and cash outflows for the time period
Opening cash balance
Cash held by the business at the start of the month
Closing cash balance
Cash held by the business at the end of the month, which becomes the opening balance of the next month
Benefits of cash flow forecasting
- They show negative closing balances, allow planning for finance
- Indicate times of excessive negative cash flow, allowing for planning for cash flow improvements
- Essential to all business plans, allows access to loans
Limitations of cash flow forecasting
Mistakes can be made in preparing revenue and cost forecasts
Unexpected costs can lead to major inaccuracies
Incorrect assumptions can be made in sales estimations
Causes of cash flow problems
Lack of planning
Poor credit control
Too much credit period offered
Expanding too rapidly
Unexpected events
Credit control
Monitoring debts to ensure that credit periods are not exceeded
Bad debt
Unpaid customers’ bills that are now very unlikely to be paid
Overtrading
Expanding a business rapidly without obtaining all of the necessary finance, resulting in a cash flow shortage
Methods of improving cash flow
Overdraft
Short-term loan
Sale of assets
Sale and leaseback
Manage trade receivables
Delay capital expenditure
Leasing, not buying
Cut overhead costs such as promotion
Manage trade payables
Possible drawbacks of overdrafts
High interest rates
Overdrafts can be withdrawn
Possible drawbacks of short-term loans
Interest has to be paid
The loan must be repaid by the due date
Possible drawbacks of the sale of assets
Quick selling can result in low prices
Assets might be needed later date for expansion
Assets could have been used as collateral for a future loan
Possible drawbacks of sale and leaseback
Leasing costs add annual overhead costs
Loss of potential profit if assets rise in price
Assets could have been used as collateral for a future loan
Possible drawbacks of delaying capital expenditure
Efficiency may reduce if inefficient equipment is not replaced
Expansion becomes very difficult
Possible drawbacks of leasing
The business does not own the asset
Leasing charges add to annual overheads plus interests
