Cash flow forecasting and working capital.pptx

Cash flow

1. Cash flow forecasting and working capital Why is cash important? Cash –  is a liquid asset immediately available for the business to use and spend . If a firm doesn’t have any cash to pay its workers, suppliers, landlord and government, the business could go into  liquidation – selling everything it owns to pay its debts. Problems for the business if it has too little cash Can’t pay employees and suppliers Production of goods stops  Liquidation (business stops and sells assets to pay debts)

2. Cash flow forecasting and working capital Cash Flow The  cash flow  of a businesses is its cash inflows   and cash outflows over a period of time. Cash inflows  are the sums of money received by the business over a period of time. E.g.: sales revenue from sale of products receipt from  trade receivables – trade receivables are customers who have already purchased goods from the business but didn’t pay for them at that time money borrowed from external sources, like loans the money from the sale of business assets investors putting more money into the business

3. Cash flow forecasting and working capital Cash outflows  are the sums of money paid out by the business over a period of time. Eg : purchasing goods and materials for cash paying wages, salaries and other expenses in cash purchasing non current assets repaying loans (cash is going out of the business) by paying trade payables of the business-  trade payables  are suppliers who supplied items to the business but were not paid at the time of supply .

4. Cash flow forecasting and working capital

5. Cash flow forecasting and working capital Cash flow is not the same as profit!  Profit is the surplus amount after total costs have been deducted from sales revenue. It includes all income and payments incurred in the year, whether already received or paid or to not yet received or paid respectfully. In a cash flow, only those elements paid or recived by cash are considered . Cash flow forecast   – Estimate of future cash inflows & outflows of the business and shows expected balance at the end of each month/period of time.

6. Cash flow forecasting and working capital Why do businesses need cash flow forecasts? To startup the business how much cash is available for paying bills, purchasing fixed assets or repaying loans how much cash the bank will need to lend to the business to avoid insolvency (running out of liquid cash) whether the business has too much cash that can be put to a profitable use in the business

7. Cash flow forecasting and working capital The  opening cash/bank balance  is the amount of cash held by the business at the start of the month Net Cash Flow = Total Cash Inflow – Total Cash Outflow The  net cash flow  is added to opening cash balance to find the  closing cash/bank balance – the amount of cash held by the business at the end of the month. 

8. Cash flow forecasting and working capital Uses of cash flow forecasts: when setting up the business   :The cash flow forecast helps calculate the cash outflows such as rent, purchase of assets, advertising etc. A statement of cash flow forecast is  required by bank managers when the business applies for a loan . The bank manager will need to know how much to lend to the business for its operations,when the loan is needed, for how long it is needed and when it can be repaid. Managing cash flow – if the cash flow forecast gives a negative cash flow for a month(s), then the business will need to plan ahead and apply for an overdraft so that the negative balance is avoided. If there is too much cash, the business may decide to repay loans or pay off creditors/suppliers.

9. Cash flow forecasting and working capital How can cash flow problems be overcome? When a negative cash flow is forecast (lack of cash) the following methods can be used to correct it: Increase bank loans:  bank loans will inject more cash into the business, but the firm will have to pay regular interest payments on the loans and it will eventually have to be repaid, causing future cash outflows Delay payment to suppliers:  asking for more time to pay suppliers will help decrease cash outflows in the short-run. However, suppliers could refuse to supply on credit and may reduce discounts for late payment Ask debtors to pay more quickly:  if debtors are asked to pay all the debts they have to the firm quicker, the firm’s cash inflows would increase in the short-run.

10. Cash flow forecasting and working capital Delay or cancel purchases of capital equipment:  this will greatly help reduce cash outflows in the short-run, but at the cost of the efficiency the firm loses out on not buying new technology and still using old equipment. In the long-term, to improve cash flow, the business will need to  attract more investors ,  cut costs  by increasing efficiency,  develop more products   to attract customers and increase inflows.

11. Cash flow forecasting and working capital Working Capital(Net Current Assets) Working capital the capital required by the business to pay its short-term day-to-day expenses.  Working capital is all of the liquid assets of the business– the assets that can be quickly converted to cash to pay off the business’ debts. Working capital= Current assets – Current Liabilities Current assets: Inventory, Trade Receivables, Cash and Cash Equivalents, Prepaid Expenses, Accrued Income Current Liabilities: Trade Payables, Bank overdraft, Prepaid Incomes, Accrued Expenses

12. Cash flow forecasting and working capital Working capital can be in the form of: cash needed to pay day to day expenses cash due from trade receivables– debtors/credit customers can be asked to quickly pay off what they owe to the business in order for the business to raise cash cash in the form of inventory –  Inventory of finished goods can be quickly sold off to build cash inflows. Too much inventory results in high costs, too low inventory may cause production to stop

13. Cash flow forecasting and working capital Jan $ Feb $ Mar $ Apr $ May $ June $ Cash Inflows Receipts 15 000 17 000 15 500 16 500 20 000 18 000 Total Inflows 15 000 17 000 15 500 16 500 20 000 18 000 Cash outflows Payments 13 000 20 000 22 000 17 000 18 000 16 000 Total Outflows 13 000 20 000 22 000 17 000 18 000 16 000 Net cash flow 2 000 (3 000) (6 500) (500) Opening Balance(Bank) 5 000 7 000 4 000 (2 500) Closing Balance (Bank) 7 000 4 000 (2 500) (3 000)

14. Cash flow forecasting and working capital Jan $ Feb $ Mar $ Apr $ May $ June $ Cash Inflows Receipts 28 700 24 600 30 250 24 500 32 000 27 350 Total Inflows 28 700 24 600 30 250 24 500 32 000 27 350 Cash outflows Payments 30 200 25 500 24 300 22 750 24 800 28 500 Total Outflows 28 700 24 600 30 250 24 500 32 000 27 350 Net cash flow Opening Balance(Bank) (1 250) Closing Balance (Bank)