CH.

31 FORECASTING AND MANAGING CASH FLOWS

Cash flow

 It is the difference between a company’s cash inflows and cash

outflows
 Without sufficient cash flow, a business can become insolvent and
force the business into liquidation
 Cash flow forecast is the estimate of a firm’s cash inflows and
outflows
 Net monthly cash flow is the estimated difference between inflows
and outflows
 Opening cash balance is the amount a business has at the beginning
of each month

Need for cash flow planning for entrepreneurs

 New businesses have less credit time

 Banks may not be willing to lend
 Limited finance at the beginning

Cash VS Profit

 A profitable business may fail due to insufficient cash

 Having enough cash – short term goal
 Good profits – long term goal

Cash inflows:

1. Owners capital
2. Bank loans
3. Customer cash purchase
4. Trade receivables payments

Cash outflows:
 1. Annual rent
2. Lease payment
3. Electricity, water bills
4. Labour costs
5. Variable costs

Cash flow forecasts – limitations

 Inaccurate figures if inexperienced

 Unexpected costs may arise
 Wrong assumptions as a result of poor market research

Causes of cash flow problems

1. Lack of planning – cash flow forecasts help us plan for future in

terms of the amount of cash needed. Without planning a business
may have insufficient cash reserves.
2. Poor credit control – inefficient management of trade receivables.
A business must keep reminding its credit customers about the
amount they owe, fi not they may become bad debts.
3. Allowing customers too long to pay debts – the business may offer
too long credit periods when compared to what it receives from
suppliers
4. Expanding too rapidly – overtrading will increase cash outflows
causing cash flow shortage
5. Unexpected events – only estimates, not 100% accurate. There
maybe unforeseen rise in outflows or fall in inflows

Ways to improve cash flow

1. Increase cash inflow

 2. Lower cash outflow

Management of trade receivables

 Not providing credit to customers. May lead to fall in

competitiveness and loss of sales
 Selling claims to a debt factor. May not receive full payment
 Identify credit worthiness of customers
 Offer discounts for prompt payments
Management of trade payables

 Increasing the range of goods bought on credit. Suppliers may not

provide discount or may refuse to provide further supplies
 Extend the period of time taken to pay. Suppliers may be reluctant
to supply

Management of inventory

 Maintain small inventory levels

 Using computer systems to record inventory
 JIT inventory system

Cash management

 Use cash flow forecast

 Plan for future and range external finance when needed

Working capital increase – permanent

 Long term loans

 Issue of shares