3.7.

Cash Flow

 Cash vs. profit

 Having cash or cash flows IS NOT the same as having profit
 Good cash flow, poor profits – cash is coming from sources other than sales
revenue (e.g. loans, capital investments, etc.)
 Poor cash flow, good profits – sales are good, but payment of loans, capital
equipment, poor collections practices, and early payments of supplies can bring cash
flow down
 Working capital cycle
 Cash In
 Payments to suppliers/employees/cash
 Goods Produced
 Goods Sold
 Alternatively,
 Cash In
 Payments to suppliers/employees/cash
 Services Rendered
 Lag in flow of cash in the cycle can lead to slow down of production/operations

 Cash flow forecasts

 Financial document that shows expected monthly cash inflows and outflows
 Cash inflows – usually from sales revenues when cash payment is received
 Cash outflows – payment of bills, usually itemized expenses
 Net cash flow – the differences between cash inflow and outflow per period
 Constructing cash flow forecasts:
 Get the Opening Balance
 Amount of cash at the beginning of the trading period
 Add Cash inflow from sales + other income
 Add itemized cash outflow of expenses including: stocks, labor,
etc.
 Closing balance is the opening balance of the next month
 Causes of cash flow problems:
 Overtrading
 Overborrowing
 Overstocking
 Poor credit control
 Seasonal or unforeseen causes
 Relationship between investment, profit, and cash flow
 Investments are cash outflows done to improve the processes, products, or service
of a company.
 Purchasing assets with the goal to yield future financial benefits.
 e.g. better equipment, more seats
 Cash flows are the flow of cash going in or out of a company’s finances.
 Investments should bring in higher cash inflows in the future ideally.
 e.g. more customers, more sales
 Profits
 If the cash inflows and other revenue sources are higher than all cash
outflows and expenses, then a company has profit
 This is the ultimate goal of a company

 Managing the working capital/dealing with cash flow problems

 Raise cash inflow
 Tighter credit control
 Cash payments
 Change of pricing policy
 Broaden product portfolio
 Marketing planning
 Lower cash outflow
 Preferential credit terms
 Alternative suppliers
 Stock control
 Lower expenses
 Alternative finance sources
 Overdraft
 Sale and leaseback
 Debt factoring
  Sale of fixed assets
 Government assistance
 Growth and evolution
 Other measures
 Contingency funds
 Develop wider customer base
 Request for partial payment
 Pay large bills by installments
 Improve quality

 Limitations of cash flow forecasting

 Inaccuracies occur due to a number of internal and external reasons:
 Poor marketing forecasts
 Workforce conflicts or motivational issues
 Operations/Manufacturing delays
 Business competition
 Changing trends and demand
 Economic changes and external shocks