CASH FLOW

CASH FLOW

• In pairs, list down the items that will cause money to exit from a business.
• Also list down the items that will cause the money to come into a business.
• Cash is the money that a business has in hand and cash that is held at bank.
• Cash flow is the movement of cash into and out of a business.
CASH & PROFIT

• Sales can be both credit and cash.

• Credit sales means that there is a lag between sale of goods and receipt of
payment from the buyer.
• Hence a profitable business may be cash deficient.
• Rapid expansion, seasonal variations may also lead to shortage of cash.
WORKING CAPITAL

• Working Capital (WC) is cash and liquid assets available for daily running of
business.
• WC = CA-CL
• Liquidity is the ease with which the assets of a business maybe converted into cash.
• Insolvency is the inability of a business to meet its CL due to shortage of WC.
• Liquidation is where the assets of a business are sold to pay the creditors.
 WORKING CAPITAL CYCLE
• It is the time between cash payments made to meet the cost of production and cash
received from sale of goods to customers.

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WORKING-CAPITAL-CYCLE
CASH FLOW FORECAST

• Financial document that shows expected movement of cash into and out of a
business during a time period.
• Used to assess financial health of the business.
• Helps managers as cash flow problems maybe anticipated and corrective
action maybe taken.
• Improves planning process through achievement of organizational objectives.
CASH FLOW STATEMENT
($) Jan Feb Mar Apr
Opening Balance 1000 3000
Inflows
Cash Sales 5000 2800
Income from Rent 2000 2000
Total Inflow (A) 7000 4800
Outflows
Wages 3000 4500
Raw Material 2000 2000
Total Outflow (B) 5000 6500
Net Cash Flow(A- 2000 (1700)
B)
Closing Balance 3000 1300
CAUSES OF CASH FLOW PROBLEMS

• Over trading, rapid expansion

• Over borrowing
• Over stocking
• Poor credit control
• Unforeseen changes, seasonal fluctuations
STRATEGIES TO DEAL WITH CASH FLOW
PROBLEMS
• Improved credit terms through negotiation or alternate suppliers
• Stock control measure e.g. Just in time. Not effective for service providers like airlines.
• Reduce expenses
• Lease/rent machinery, land
• Improved credit control, incentivize cash payment, interim payment, cash sales
• Price reduction
• Diversified product portfolio
• Overdraft
• Debt factoring
• Government assistance
• Sale of fixed assets
LIMITATIONS OF CASH FLOW FORECAST

• Marketing problems, incorrect forecast of sales

• Human resource problems and conflicts
• Operations issues like machinery breakdown
• Competitor action
• External changes like in the economy, natural calamity
CUEGIS CONCEPT, FA

• Discuss the impact of cash flow management on a business through any two
concepts of your choice.
• Case study to follow in the email – 3.7.3