- Cash vs. profit
- Having cash or cash flows IS NOT the same as having profit
- Good cash flow, poor profits – cash is coming from sources other than sales revenue (e.g. loans, capital investments, etc.)
- Poor cash flow, good profits – sales are good, but payment of loans, capital equipment, poor collections practices, and early payments of supplies can bring cash flow down
- Working capital cycle
- Cash In
- Payments to suppliers/employees/cash
- Goods Produced
- Goods Sold
- Alternatively,
- Cash In
- Payments to suppliers/employees/cash
- Services Rendered
- Lag in flow of cash in the cycle can lead to slow down of production/operations
- Cash flow forecasts
- Financial document that shows expected monthly cash inflows and outflows
- Cash inflows – usually from sales revenues when cash payment is received
- Cash outflows – payment of bills, usually itemized expenses
- Net cash flow – the differences between cash inflow and outflow per period
- Constructing cash flow forecasts:
- Get the Opening Balance
- Amount of cash at the beginning of the trading period
- Add Cash inflow from sales + other income
- Add itemized cash outflow of expenses including: stocks, labor, etc.
- Closing balance is the opening balance of the next month
- Causes of cash flow problems:
- Overtrading
- Overborrowing
- Overstocking
- Poor credit control
- Seasonal or unforeseen causes
- Relationship between investment, profit, and cash flow
- Investments are cash outflows done to improve the processes, products, or service of a company.
- Purchasing assets with the goal to yield future financial benefits.
- e.g. better equipment, more seats
- Cash flows are the flow of cash going in or out of a company’s finances.
- Investments should bring in higher cash inflows in the future ideally.
- e.g. more customers, more sales
- Profits
- If the cash inflows and other revenue sources are higher than all cash outflows and expenses, then a company has profit
- This is the ultimate goal of a company
- Managing the working capital/dealing with cash flow problems
- Raise cash inflow
- Tighter credit control
- Cash payments
- Change of pricing policy
- Broaden product portfolio
- Marketing planning
- Lower cash outflow
- Preferential credit terms
- Alternative suppliers
- Stock control
- Lower expenses
- Alternative finance sources
- Overdraft
- Sale and leaseback
- Debt factoring
- Sale of fixed assets
- Government assistance
- Growth and evolution
- Other measures
- Contingency funds
- Develop wider customer base
- Request for partial payment
- Pay large bills by installments
- Improve quality
- Limitations of cash flow forecasting
- Inaccuracies occur due to a number of internal and external reasons:
- Poor marketing forecasts
- Workforce conflicts or motivational issues
- Operations/Manufacturing delays
- Business competition
- Changing trends and demand
- Economic changes and external shocks