Chap 30
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Zainab MuneebChap 30
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Zainab MuneebChapter 30: Forecasting and Managing Cash Flows
1. Cash Flow
The movement of cash into and out of a business over a specific period.
2. Profit vs. Cash Flow
Profit is the financial gain when total revenue exceeds total costs.
Cash flow refers to actual cash movements, meaning a business can be profitable but
still have cash shortages if its money is tied up in receivables or inventory.
3. Cash Flow Forecast
A financial document that predicts future cash inflows and outflows, helping
businesses anticipate liquidity issues.
4. Components of a Cash Flow Forecast
Opening Cash Balance: The amount of cash a business has at the start of a period.
Cash Inflows: Money coming into the business, such as sales revenue, loans, or
investments.
Cash Outflows: Payments the business makes, including rent, wages, loan
repayments, and supplier payments.
Closing Cash Balance: The final amount of cash available at the end of the period.
5. Causes of Cash Flow Problems
Overtrading: Expanding too quickly without sufficient working capital.
Poor Credit Control: Failing to collect debts from customers on time.
Excessive Stock Levels: Holding too much inventory, tying up cash.
Unexpected Expenses: Sudden costs, such as equipment breakdowns, affecting
available cash.
6. Methods of Improving Cash Flow
Reducing Credit Terms: Encouraging customers to pay faster.
Delaying Supplier Payments: Negotiating longer payment terms with suppliers.
Cutting Costs: Reducing overhead expenses.
Selling Unused Assets: Liquidating non-essential assets to generate cash.
Using Overdrafts or Short-term Loans: Accessing quick finance to cover shortfalls.
7. Working Capital
The funds available for daily operations, calculated as:
Working Capital=Current Assets−Current Liabilities\text{Working Capital} = \
text{Current Assets} - \text{Current
Liabilities}Working Capital=Current Assets−Current Liabilities
A positive working capital ensures smooth business operations.
8. Trade Receivables (Debtors)
The money owed to a business by its customers for sales made on credit.
9. Trade Payables (Creditors)
The money a business owes to suppliers for goods or services received on credit.
10. Overdraft
A short-term financing option where a business can withdraw more money than it has
in its bank account, often with high interest rates.
11. Net Cash Flow
The difference between total cash inflows and total cash outflows in a given period:
Net Cash Flow=Total Inflows−Total Outflows\text{Net Cash Flow} = \text{Total
Inflows} - \text{Total Outflows}Net Cash Flow=Total Inflows−Total Outflows
A negative net cash flow means the business is spending more cash than it is
receiving.
12. Inventory Holding Period
The time goods remain in stock before being sold, affecting liquidity.
13. Debtor Collection Period
The average time taken to collect payment from customers.
14. Creditor Payment Period
The average time a business takes to pay its suppliers.
15. Importance of Cash Flow Management
Businesses with poor cash flow management often face insolvency, even if they are
profitable.
Financial institutions assess cash flow forecasts before approving loans or investments