Cash Flow

Lesson Objectives

By the end of the lesson you should be able to: Explain the advantages and

disadvantages of cash flow forecasts. Identify causes and solutions of cash flow

problems. Explain the difference between cash and

profit.

Example cash flow forecast. January February

Cash in:

Cash out:

Wages

Stock

Building maintenance

Total Outflow

Net Cash Flow

Opening Balance

Closing Balance

12

3

2

5

10

2

4

6

Add up all the cash going out

of the business

Cash coming into

the business minus the cash going

out.

The balance taken from the

last months closing balance.

Net cash flow plus opening

balance.

Cash Flow Forecasting.

Advantages: Helps businesses plan. Sets targets. Supports fund

applications. Improves efficiency.

Problems: Changes in consumer

taste/trends/competition Inaccurate market research Changes in minimum wages Changes in level of

spending in the economy

Causes of Cash Flow Problems:

poor stock management. Unanticipated costs e.g. replacing

equipment. Raw Material Price Increase. Increase in payments on debts.

Causes of Cash Flow Problems:

Seasonal demand.Overtrading.

Problems with debtors paying up.

credit sales.

Solutions to Cash Flow Problems:

Debt factoring.

____________________________________ Sale and leaseback.

____________________________________ Improved stock management.

____________________________________

Solutions to Cash Flow Problems:

Better debt/credit management.

_________________________________ Set up a contingency fund.

_________________________________ Review product portfolio if seasonal.

_________________________________ Timing your spending carefully.

_________________________________

Ensure you draw up forecasts and act on a potential cash flow crisis

do not spend until you have the money [not always practical]

Why are small firms more likely to suffer cash flow problems?

Smaller market to rely on May only have one main customer Can not demand credit terms Do not have access to lots of cash

inflows May have to offer credit to gain the

edge over competition

The difference between cash and profit

Cash flow represents money

from several sources

is affected by the timing of payments into and out of the firm

is critical for the firm’s survival

Profit is the money left

over from sales revenue once costs have been subtracted

is calculated before the money is received

is not critical to the firm’s survival