Cash flow management

Key terms Cash outflows: money leaving the business Cash inflows: money coming into the business Opening balance: the amount a business has in their bank account at the start of the month (this is the same as the previous months closing balance) Closing balance: the amount a business has in their bank account at the end of the month Net cash flow: cash inflows-cash outflows Overdraft: when more money is taken out of a bank account than is actually in there (an arrangement agreed with the bank) Credit periods: the length of time given to customers to pay for the goods and services Debtors: customers who owe the business money Creditors: suppliers that the business owes money to Liquidity: measure of a firms ability to meet short-term cash payments

What is a cash flow forecast? It tries to predict in advance what and when cash will be flowing in and out of a business A healthy cash flow is crucial to the survival of a business – it means that at any point in time a business will have enough cash to meet the demand for short-term cash outflows It’s needed to help secure finance from the bank or other investors needed for the start up of the business

Problems within cash flow Problems occur when outflows are greater than inflows (money going out of the business is greater than the money coming into the business)

Problems continued Unable to pay creditors (usually suppliers that the business owes money to by the deadline given) Unable to pay bank loans/overdrafts on time therefore increasing the interest repayments Struggle to obtain debtors payments on time (customers who owe the business money might delay their payment if they can’t afford to pay on time) Cost of suppliers goods might increase and therefore impact the outflows of the business (making it more expensive to produce the products) Demand might not be as high as the business predicted, which will bring in less revenue than expected

Solutions to problems Overdraft arrangements – agree with the bank an overdraft facility that allows a business to have a greater outflow than inflow in case of emergencies Negotiate prices with suppliers to reduce costs and also negotiate terms with creditors to increase the number of days that a business has before they need to pay their suppliers (aka creditors)

Solutions continued Review and reschedule capital expenditure. Where there are months that look like there might be shortfall, perhaps delay any capital expenditure Consider leasing capital equipment (borrowing capital equipment on loan instead of buying it outright)