CASH FLOW

Cash Profit
• Described as the lifeblood of a • It is the positive difference
business. between a firm's total sales
revenue and its total costs of
production.

THE DIFFERENCE • Every organization needs cash to

keep functioning.
• Any sales beyond a firm's break-
even point generates profit for the
BETWEEN CASH AND business.

PROFIT • Cash is needed to pay for daily

costs. Cash is a current asset. It can
• When customers pay on credit, the
firm does not receive the cash at
be either held 'in hand' or 'at bank' the time of purchase, so, profit is
made before the cash is received.

• Cash is the money that a business • It is therefore possible for a firm to

receives from the sale of goods and be profitable but cash deficient
services.
 WORKING CAPITAL
qWorking capital refers to the cash or liquid assets available for the daily running of a
business.
qIt shows the funds that are available for a business to pay for its immediate costs and
expenditure, e.g.
qraw materials
qwages
qpaying suppliers

qA lack of working capital means that the firm has insufficient cash to fund its routine
operations.
qInsufficient working capital is the single largest cause of business failure, rather than a
lack of profitability.
CONTINUED…

qLiquidity refers to how easily an asset can be turned into cash.

qHighly liquid assets are those that can be converted into cash quickly and easily

without losing their monetary value.

qWorking capital (or net current assets) is calculated using the formula:

Working Capital = Current assets - Current liabilities

CURRENT ASSETS
qCurrent assets are the liquid resources belonging to a business, which can be
converted to cash within a year.

qThey are mentioned in the balance sheet of a company.

qThere are three main types of current assets:

­ Cash

­ Debtors

­ Stock
CURRENT LIABILITIES
qCurrent liabilities refers to the money that a business owes that needs to be repaid
within a year.

qThey are present in the balance sheet of an organization.

qSome examples of current liabilities are;

• Overdrafts

• Creditors

• Tax
THE WORKING
CAPITAL CYCLE
Cash Production
Working capital refers to the cash
Costs
or liquid assets available for the
daily running of a business.
The interval between cash
payments for costs of production
and cash receipts from customers
is known as the working capital
cycle.
Sales
CASH FLOW FORECASTS
qIt is a financial document that shows the expected movement of cash into and out of a
business, per time period.
qCash flow forecast is based on three concepts;
qCash Inflows
qCash Outflows
qNet Cash Flow

qBanks and other lenders to assess the financial health of the business seeking external
finance.
qManagers to anticipate and identify periods of potential liquidity problems.
qHelps in business planning.
 CONSTRUCTING CASH FLOW FORECASTS
Jul Aug Sept Oct Nov Dec

Opening balances ($) 5000 3000 300 (1400) (2600) 600

Inflows ($)
Cash sales revenue ($) 6000 5000 6500 6800 7500 9500
Other income ($) 0 0 0 0 4000 0
Total cash inflows ($) 6000 5000 6500 6800 11500 9500
Outflows ($)
Stock ($) 2500 2200 2700 2700 3000 3300
Labour costs ($) 3500 3500 3500 3500 3500 3500
Other costs ($) 2000 2000 2000 1800 1800 2200
Total cash outflows ($) 8000 7700 8200 8000 8300 9000

Net cash flows ($) (2000) (2700) (1700) (1200) 3200 500
Closing balance ($) 3000 300 (1400) (2600) 600 1100
TWO IMPORTANT PARTS OF CASH FLOW FORECASTS
qOpening balance: It is the amount of cash at the beginning of a trading period.

qClosing balance: It is the amount of cash at the end of a trading period. It is

calculated by the formula:

(Closing balance = Opening balance + Net cash flow)

 Overtrading

Overborrowing

CAUSES OF CASH Overstocking

FLOW PROBLEMS
Poor credit control

Unforeseen changes
INVESTMENT, PROFIT AND CASH FLOW
Investment, profit and cash flow are interlinked.
qWhen a business sells an investment, it experiences an increase in its cash flow
position. The opposite happens when a business buys an investment.

qWhen a firm obtains finance for investments, the cash inflow improves its liquidity
position.
STRATEGIES TO DEAL WITH CASH FLOW
PROBLEMS
qReducing cash outflows

qImproving cash inflows

qSeeking alternative sources of finance

REDUCING CASH OUTFLOWS
These methods of improving the cash flow position of a firm deal with reducing costs
and/or delaying the payment of costs.

qSeek preferential credit terms

qSeek alternative suppliers
qBetter stock control
qReduce unnecessary expenses
qLeasing or renting
IMPROVING CASH INFLOWS
qTighter credit control

qCash payments only

qChange pricing policy

qImproved product portfolio

SEEKING ALTERNATIVE SOURCES OF FINANCE
qOverdrafts

qSelling fixed assets

qDebt factoring

qGovernment assistance
 LIMITATIONS OF CASH FLOW FORECASTING
Cash flow forecasting attempts to predict the liquidity position of a business in the future,
based on certain assumptions. Inaccuracies can occur due to several reasons, such as:
§Marketing (Inaccurate or poor market research)
§Human resources (A demoralized workforce becomes a less productive workforce)
§Operations management (Machine failure can cause production delays)
§Competitors (The behavior of rival firms can be difficult to anticipate)
§Changing fashion and tastes (Some products may become unpredictably popular, vice
verse)
§Economic change (Changes in economic factors can also present opportunities or
threats)
§External shocks (Events such as wars, oil crises, stock market crashes, health scares or
adverse weather)
CASH FLOW AND THE CUEGIS
qCash flow forecasting can be an effective management tool to oversee and control a firm’s
working capital.

qThe forecasts and calculations are static, i.e., they only represent the cash flow situation of a
firm at one point in time.

qChanges in the business environment will alter cash flows, perhaps in a detrimental way.

qCash flow problems can occur at any time due to changes in the external environment,
thereby causing huge disruptions to even the most established and globalized businesses.