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3.7. Cash Flow Summary

  • 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 InPayments to suppliers/employees/cashGoods ProducedGoods SoldAlternatively,
    • 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 outflowsCash 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 periodConstructing 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 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 policyBroaden product portfolioMarketing planning
      Lower cash outflow
      • Preferential credit termsAlternative suppliers
      • Stock control
      • Lower expenses
      Alternative finance sources
      • OverdraftSale and leasebackDebt factoringSale of fixed assetsGovernment assistanceGrowth and evolution
    • Other measures
      • Contingency fundsDevelop 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 forecastsWorkforce conflicts or motivational issues
      • Operations/Manufacturing delaysBusiness competition
      • Changing trends and demand
      • Economic changes and external shocks

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