CASHFLOW FORECAST AND WORKING CAPITAL.pptx

Business

1. Cash is a liquid asset, meaning that can be spent on goods and services any time. Many business experience cash flow problems, meaning that they do not have enough cash to do what they want to do. Cash flow means "the flow of money in and out of a business".

2. Sale of goods for cash. Payment from debtors. Borrowing from a source (but will inevitably lead to cash outflow in the future). Sale of unwanted assets. Investment from investors: shareholders and owners

3. Purchasing goods for cash. Payment of wages, salaries and others in cash. Purchasing fixed assets. R e p a y in g l o a n s . R e p a y in g c r e d i t o r s .

4. Cash flow = Cash inflow - Cash outflow Profit = Sales to Customers – Cost of goods sold HOW IS IT POSSIBLE THAT PROFITABLE BUSINESS MAY RUN OUT OF CASH? Allowing customers too long to pay back, Purchasing too many assets at once. Producing or purchasing too much stock/inventory when expanding too quickly .

5. Sales to Customers $ 50,000 (40% cash, 60% credit of two months) Cost of Goods Sold $ 18,000 (Cash)

6. PARTICULARS APRIL ($) MAY ($) JUNE ($) Opening Balance (A) 1,000 1,500 (500) Cash Inflows (B) 3,500 4,500 5,000 Cash Outflows (C) 3,000 6,500 4,000 NET CASH FLOW (D = B - C) 500 (2,000) 1,000 Closing Balance (A+D) 1,500 (500) 500 As we can see, the closing balance in May is negative, which means that it has become overdrawn.

7. I f the business cannot delay some payments by two months it has two options Use another source of finance like loan As the shortage is forecasted to be for a short term, the business may arrange an overdraft with bank to cover the shortage . In case of negative balance of cash business can delay some payment to have positive cash flow If the business knew in advance are there is going to be a period of cash shortage it can take action to try to prevent this from happening.

8. Ask customer to pay more quickly for goods by offering discount to customers who have been sold goods on credit Negotiate longer credit terms with suppliers Delay the purchase of non current asset until the cash flow improves increase bank loan or overdraft facility

9. All the business must have enough finance to pay for their day to day expenses such as paying workers wages and buying raw materials. Working capital measures the liquidity of business. Liquidity is the ability of a business to pay its short term debts Business which does not have enough working capital will be illiquid as it cannot pay its short term liabilities Business may have to borrow the finance required business pay interest on the amount borrowed and this increases their business fixed cost