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    Wassim Alwan
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    This document discusses cash flow, cash flow forecasting, and working capital. It defines key terms like cash flow, cash inflows and outflows, and cash flow cycle. It explains that a cash flow forecast estimates future cash balances and is useful for starting, managing, and obtaining loans for a business. The document also discusses short-term and long-term solutions for cash flow problems, defines working capital, and notes that working capital management reflects a business's financial strength.

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    This document discusses cash flow, cash flow forecasting, and working capital. It defines key terms like cash flow, cash inflows and outflows, and cash flow cycle. It explains that a cash flow forecast estimates future cash balances and is useful for starting, managing, and obtaining loans for a business. The document also discusses short-term and long-term solutions for cash flow problems, defines working capital, and notes that working capital management reflects a business's financial strength.

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    14 views4 pages

    Chapter 20

    Uploaded by

    Wassim Alwan
    This document discusses cash flow, cash flow forecasting, and working capital. It defines key terms like cash flow, cash inflows and outflows, and cash flow cycle. It explains that a cash flow forecast estimates future cash balances and is useful for starting, managing, and obtaining loans for a business. The document also discusses short-term and long-term solutions for cash flow problems, defines working capital, and notes that working capital management reflects a business's financial strength.

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    Chapter 20 Cash-Flow Forecasting & Working

    Capital
     Cash is a Liquid Asset – it can be immediately available to spend on
    goods & services
     Cash Flow – the cash inflows (money received by business)
    & outflows (money paid) over a period of time
     Cash inflow – money coming in the business
    o Sale of goods
    o Sale of assets
    o Payments to debtors
    o Borrowing money
    o Investors
     Cash outflow – money going out of the business
    o Purchase of goods
    o Purchase of noncurrent assets
    o Payments of salaries
    o Repaying loans
    o Trade payables
    Cash flow cycle
     It shows the stages between paying out cash and receiving cash
     Stages: ⦁ Cash needed to pay for
    o Materials, wages
    o Goods produced
    o Goods sold
    o Cash received
     The longer the cash flow cycle takes to be completed, the greater the
    working capital should be.
     Cash flow is not the same as profit
     Profit consists of goods sold on credit, whereas cash flow is the
    amount of cash sales a business made in a month.
     When profitable businesses run out of cash, it is known as insolvency.
     Due to:
    o Overtrading
    o Long credit time
    o Less credit time received
    o Many fixed assets purchased
    Cash flow forecast
     Cash-Flow Forecast – an estimate of future cash inflows and outflows.
     A cash-flow forecast shows the expected cash balance at the end of
    each month:
     Cash flow forecasts are just little charts with values comparing 2
    different time periods (months/years etc.)
     Net Cash Flow – The difference between the cash inflow and outflow
    (inflow – outflow)

    Uses of Cash Flow Forecast


     Cash flow forecasts are useful because:
    o Starting up a business
     The first few months are very crucial to every business as
    owners don’t realise the amount of cash needed, due to
    which they fail.
     Businesses need to spend on labour, land, and capital.
    They even have to advertise and promote extensively.
     Many owners don’t understand the importance of cash
    flow in a business, due to which they fail.
    o Keeping the bank manager informed
     A cash flow forecast will help a business receive a loan
     The bank manager needs to be aware of when the
    amount is needed, for how long, and when it will be
    repaid
    o Managing an existing business
     A cash flow forecast will help a business receive a loan
     The bank manager needs to be aware of when the
    amount is needed, for how long, and when it will be
    repaid
    o Managing cash flow
     Businesses with high bank balances can use their cash
    effectively in other areas.
    How to overcome cash flow problems?
    Short term solutions
     Increasing bank loans will inject more cash into the business, but both
    interest and loan will have to be paid.
     Delaying payments to suppliers will decrease cash outflows in the
    short run, but suppliers may refuse to provide discounts or supply.
     Reducing credit period may help a business increase short-term cash
    inflows, but customers may switch to competitors.
     Delaying the purchase of fixed assets will reduce cash outflows, but in
    the long run, a company may lack efficiency as they don’t have up–to–
    date technology
    Long Term Solutions
     Attracting new investors
     Cutting costs and increasing efficiency using lean production
     Develop new products
    Working Capital
     It is the capital available to a business in the short run to pay for day –
    to – day expenses
    Working Capital = Current Assets – Current Liabilities
     It is the life blood of the business
     It assists in identifying the credit reputation of a business
     Working capital can be in the form of:
    o Cash
    o Value of debtors
    o Value of inventory
     Overall success depends on the working capital position
     Working capital should be handled properly because it shows
    investors & banks how efficient a business is and its financial strength

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