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:
