Forecasting cash flows Chp 27 Flashcards
What’s forecasting a cash flow?
What are debtors?
Trying to estimate future cash inflows and outflows, usually on a month-by-month basis
Debtors are customers who have bought products on credit, who will pay cash at an agreed date in the future.
What’s in a cash inflow (part of cash flow forecast) ?
- owners injected capital
- cash sales
- bank loan payments
- debtor’s payments
All payments to a firm
What’s in a cash outflow ?
- lease payments for premises
- annual rent payments
- bills
- labour cost payments
- variable cost payments
All payments made by the firm
Net (monthly) cash flow =?
= total cash inflows - total cash outflows
Closing balance becomes?
The next months opening balance ( amount of money at the start of the month)
If the closing balance is positive, then the bank overdraft has been fully paid!
Why is cash flow forecasting important/ advantages
-If negative cash flows appear to be too great- then plans can be made to reduce this:
E.g cutting down on purchase of materials, machinery, not selling on credit.
-by showing periods of negative cash flow then- plans can be made to provide additional finance!
For e.g bank overdrafts/ more injected capital from owner
-a new business proposal/plan will never progess beyond initial planning stages, unless investors/bankers see a proper cash flow forecast.
Limitations of cash flow forecasting?
- mistakes can be made in preparing the revenue and cost forecasts. Because they may have been drawn up by inexperienced staff/entrepreneurs.
- won’t be 100% accurate. As internal and external factors can blow a forecast off course
- unexpected cost increases can lead to major inaccuracies e.g fluctuations in oil prices- can result in misleading cash flows
-wrong assumptions in estimating the sales of a firm ( due to poor marketing if the product/ poor market research)
Making forecast inaccurate!
Causes to Cash flow problems?
- allowing customers too long to pay debts, when they prolong the agreed date for the cash to be repaid.
This-reduces short term cash inflow - unexpected events such as competitor lowering prices or decline in predicted sales income etc- a forecast is never 100% accurate.
- Lack of planning-can be used to predict potential cash flow problems so managers can take action in advance to overcome them.
-Expanding too rapidly
Where firm has to finance the expansion and increase wages before receiving cash from add. Sales.
As without obtaining the necessary finance, this leads to cash flow shortages (overtrading)
-poor credit controls- having the ability to control debtors paying cash on time! This could create bad debts, when the money is unlikely to be paid
Ways to improve cash flow?
Increase cash inflows
Reduce cash outflows
To manage working capital
Improve cash position of sales/profit
How to increase cash inflows?
E.g for (what it is & drawbacks):
-OVERDRAFT: when bank and firm agreed on a limit to which the firm can borrow up to, over an agreed time.
Yet=comes with high interest rates and be withdrawn from banks!
SHORT-TERM LOANS: Fixed amount borrowed for an agreed length of time.
Yet= interest costs + loans must be repaid at due date.
SALE OF ASSETS: redundant assets are sold for cash receipts- boosts cash inflow.
Yet= selling quickly can lead to low price, assets might be needed later when expanding.
LEASE COSTS: selling to a leasing company+ leasing it back.
Yet= leasing costs add to annual overheads (results in loss of profit if asset raises in price) (collateral for future)
REDUCE CREDIT TO CUSTOMERS + DEBT FACTORING:
-cash inflow can be gained by reducing period of credit terms
-selling claims of a debtor in exchange for immediate liquidity- only part of debt is repaid
- the debt factoring firm pays for customers bills and customer later repays the company
Yet= only 90.95% of debt is repaid
And profit is reduced
What’s a cash inflows and cash outflows?
What’s an Insolvent?
Cash INFLOW: payments RECEIVED by a business (from customers/banks)
Cash OUTFLOW: payments MADE by a business (to workers / suppliers)
Insolvent: when a business can’t meet it’s short term debts
