F5- Cash Flow Flashcards
What is cashflow?
The movement of cash into and out of a business over a given period of time.
What is cash in?
A forecast of cash inflows including receipts from cash and credit sales.
What is cash out?
A forecast of cash outflows including expenditure on direct costs and indirect costs.
What is net monthly cashflow?
The forecasted changes to the business’ cash position fr that time period. Calculated by: cash inflows - cash outflows
What is the closing balance?
The business’ cash position at the end of the time period. Calculated by: opening balance + net cashflow
What is the opening balance?
The business’ cash position at the start of the time period. It is identical to the closing balance of the previous time period.
What is a cashflow problem?
When cash out > cash in, so there is a negative net cashflow. This may lad to a negative closing balance and if persistent could lead to bankruptcy or administration.
Overtrading
Rapid Growth
Excess cash going out, no cash in
Spending too much money
Allowing too much trade credit
Large delay of cash coming in compared to cash going out
Affected by: no. of people. value of goods and length of time
Timing of payments and receipts
Large delay between payments and receipts
Poor credit control
No credit checks
Cash outflows without cash inflows
Inaccurate cashflow forecasting
Lower cash inflows/higher cash outflows
Stockpiling
Lots of cash out to suppliers, cash tied up in stock —> may become obsolete, too much raw materials in the worse due to the time until cash in
No enough cash coming in
Fall in demand
Lower cash in due to lower sales
Increased raw material costs
Higher cash out to suppliers
Unexpected events eg. machinery breakdown
High cash out/lower cash in/mixture of both
Investing too much in non-current assets eg. machinery, vehicles, property.
Lots of cash out
No/little cash in
Seasonal product
Little cash in at times of the year when the product isn’t in season, whilst cash will still be going out for fixed costs.
Importance of monitering cashflow.
Spotting issues early allows you to take action.
Essential to access the reasons in order to take the most appropriate action, eg. one off event, seasonal variations, or is there a trend developing eg, falling sales.
What is working capital?
Money available to carry out day to day activities.
Improved control of working capital
Sale and leaseback
Debt factoring
Negotiate improved terms for trade credit
With suppliers
Increase payable days to delay cash going out
BUT may lose out on discount for cash purchase
Offer less trade credit/discount to prompt payment
Brings forward cash in
Speeds up receivables, less receivable days
BUT may lose customers that can’t pay upfront
Debt factoring
Immediate cash in to improve working capital
Reduces receivable days
Bad debts- customers that haven’t payed
BUT have to pay commission/fee so don’t receive the full amount of the debts.
Overdraft/short-term loans
Negative closing balance, unexpected event or seasonal sales
Ability to have greater cash in
BUT interest rates, fixed amount, bank can withdraw it at short notice
Sales and leaseback
Immediate cash in from asset sale to improve working capital
BUT no longer own the asset, have to pay for the lease
Spreading quarterly or annual payments
Small payments so less cash out each month
BUT no reduction in the total, may only transfer cashflow problems to other months
Don’t stockpile
Only buy stock when needed: JIT stock management
Reduces cash outflows to suppliers
Less risk
BUT cannot cope with demand surges and rely heavily on suppliers
Diversify product range
Spread risk
Seasonal products can complement each other
Cash inflows from different products across the year
BUT costly and time consuming
Grow slowly not rapidly
Reduces cash outflows
BUT risk of competition’s success rather than your business
Better market research to anticipate change
Improved cashflow forecasts
Cash in and cash out more accurate
More time to prevent cashflow problems
BUT reliable research doesn’t prevent changes in the external business environment i.e. PESTLE-C
Benefits of managing cashflow well
Reduce borrowing costs- less need to overdrafts as you can take action early, lower interest rates and penalty charges
Good relationship with suppliers- don’t let them down, pay on time = more likely to receive a discount.
Public relations- customers lose confidence if you are unable to meet orders- if you have cashflow problems this will only make things worse.
Why are cashflow forecasts useful?
Arrange financial cover in advance eg. an overdraft
See problems before they arise, time to make improvements
Required when applying for a bank loan
Limitations of a cashflow forecast
Only as reliable as the estimates they’re based on
Amounts and timings are estimated
Managers should draw up a best case and worse case scenario and always be aware of the economic climate
