Forecasting and managing cash flows

Difference between cash and profits

• Cash is the actual cash inflow and outflow of a business, whereas, profit consists of all the anticipated incomes and expenses of a business
  
• For example:I have bought a sapphire ring by cash at $2000 and sold it on credit for $2500.thus, my profit will be $500. But my net cash flow in the business would be -$2000. It is because I havent yet received the money from selling.

IF a business runs out of cash, it might get into huge troubles, for instance, it might not be able to repay its short term debts and it may suffer from liquidation

• Cash flow forecasts can help the business tackle any problem arising from a lack of cash. Such as, arranging a bank overdraft or preparing to inject more owner's capital.
• Plans can be made for reducing highly negative cash flows
• A new business planning will never progress beyond the initial planning stage unless investors and bankers have access to cash flow forecasts

Structure of cash flow forecasts

• SECTION 1: cash inflows
• SECTION 2: cash outflows
• SECTION3: Net monthly cash flow and opening and closing balance

Forecasting cash inflows

• Owners own capital injection
• Bank loan payments
• Customers' cash purchases-----It will highly depend on the sales forecasts and its accuracy
• Trade receivables payments-----Difficult to forecast

Forecasting cash outflows

• Lease payments for premises
• Annual rent payment
• Labour costs----these forecasts will largely base on demand forecasts
• Utility bills------will vary on many factors
• Variable cost payments

• Unexpected cost increases will lead to an inaccurate cash flow forecasts
• Wrong assumptions can be amde in estimating the sales of the business, perhaps, based on poor market research
• Mistakes can be made in preparing the revenue and cost forecasts

Methods of improving cash inflow

• Overdraft
• Short term loan
• Sale of assets
• Sale and leaseback
• Debt factoring
• Reduce credit terms to customers

Methods of reducing cash outflow

• Delay payments to suppliers
• Delay spending on capital equipment
• Cut overhead costs
• Use leasing rather than outright purchase of the capital equipment

How to manage trade receivables:

• Not extending credit periods to customers
• Debt factoring
• Paying discounts to clients who pay promptly

How to manage trade payables

• Increasing the range of goods and services bought on credit
• Extend the period of time taken to pay