Cash Flow

Cash – Working capital Profit – Total revenues less the total expenses of running a business

A change in the cash position of a business over time Cash Flow

Importance of Cash Flow Businesses need a supply of ready money Able to pay essential debts immediately Provides a good reputation with suppliers Do not have to borrow money

How to Control Cash Flow Review the current cash position Review future cash management in terms of cash flows in/out, receipts due, payments due etc Arrange for measures to correct cash flows such as bank overdrafts, loans Compare the actual situation with the forecast

Cash Flow Forecast Supports a business plan Enables owner to plan business expenditure Keeps a check on spending Shows what loans could be repaid Inspires confidence Helps set business targets Shows when the money is needed and how much Helps when applying for a loan

A Cash Forecast “A forecast of receipts and payments which is normally prepared on a monthly basis for the budget period.”

Typical Receipts and Payments RECEIPTS PAYMENTS Cash Receipts Payment for purchases Debtor Receipts Overheads Interest Received Tax Tax refund Drawings

Preparing a Cash Budget 1.Prepare a sales schedule (This is a plan of the monthly sales and then monthly receipts) 2. Prepare a purchases schedule (This is a plan of monthly purchases and then monthly payments for purchases) 3. Prepare the actual cash budget

Managing Cash Deficits Leasing instead of buying equipment Delaying the purchase of equipment Shortening the average debtor collection period Reducing Stock Levels Asking suppliers to extend credit periods