2. Lecture Review
We will be looking at the following:
• The importance of cash flows in the viability
of a company
• Cash flow forecasts, how to prepare one
and their importance for a business
• The origins of cash flow problems
companies face on a daily basis
• Ways that cash can be managed to
maximise a company’s cash flows
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3. Lecture Objectives
By the end of this session, you will be able
to:
• Appreciate the importance of cash for any
business
• Identify the fundamental components of a
cash flow forecast and be able to produce
one
• Understand and comment on the reasons
behind cash flow problems
• Identify and apply solutions to cash flow 3
4. Business Cash Flows
• Movement of money within a business,
both income and expenditure
• Profits do not give a useful or
meaningful picture of a company’s
operations
• Cash flow problems are responsible for
over 78% of business failures within
their first year 4
5. Illustrated Cash Flow
O
P
E
R
A
T
I
O
N
Cash sales
Debtors
New Share Issues
Loan Capital
Creditors
Wages/Salaries
Overheads
Purchases of FA
Cash inflows Cash outflows
Investments
Dividends
6. Cash Flow Forecasting
• Primary tool in short-term financial
planning
• Identifies short-term financial
requirements and surpluses based on
companies’ budgeted activities
• Continuous activity, as budgets are
rolled forward over time (usually on a
monthly basis)
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8. Preparation of a Cash Flow Forecast
• Forecast anticipated cash inflows
• Forecast anticipated cash outflows
• Determine net cash flows
• Calculate cumulative cash flows
• Review situation and act accordingly
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9. Example of a Cash Flow Forecast
• Based on realistic estimates
• Constantly monitored and updated
• No need to be overly complicated
◦ ‘What if’ analysis can be undertaken (more later)
http://www.businesslink.gov.uk/Finance_files/Cash_Fl
ow_Projection_Worksheet.xls
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10. Aims of Cash Budgeting
• Evaluate the performance of a business
• Assess a company’s liquidity
• Assess differences between reported and
forecasted cash flows
• Assess the effects of major transactions
in the year.
• Ensure that company’s overdraft facility
is sufficient to accommodate variations in
trading 10
11. Cash Flow Problems (1)
• Debtors
◦ Norm for firms to offer credit to their customers
◦ Good management system integrating cash
budgeting and cash flow forecasting
◦ Failure to pay back at the agreed time has an
impact on the cash position of the company
◦ Bigger companies ‘abusing’ smaller companies by
delaying payments
Late Payment Interest Act
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13. Why Can Debtors Become a Problem?
• Debtors hold key to liquidity
◦ Stocks need to be turned into sales before
generating cash flows and
◦ Large cash balances are generally
unprofitable to hold
• Debtors are not turned into cash fast
enough because of:
◦ credit terms
◦ overdue situation(s)
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14. Cash Flow Problems (2)
• Creditors
◦ Taking credit is seen as “a good thing”
◦ Money stays in the firm for longer
◦ Pay suppliers later (?)
◦ Dependence on debtors paying on time
leads to firm failing to pay off its debt on time
(domino-effect)
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16. Cash Flows and Credit Terms
• Cash flows are also affected by changes in
their own credit terms
◦ Tighter debtor credit terms
◦ Looser debtor credit terms
◦ What about the terms offered by the
suppliers?
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17. Cash Flow Problems (3)
• Over-financing
◦ Borrowing excessive amounts of money leads to
financial difficulties
• Overtrading
◦ Expansion of sales on credit without enough
capital affects companies’ cash flows
• Over-investment
◦ Excessive investment in assets
• Poor stock control
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18. Managing Income and Expenses
Debtor management
• Credit policy
• Efficient invoicing/collection
• Charging interest on late payments
• Offer of discount for prompt payments
• Negotiation of deposits or staged
payments
• Debt factoring and/or invoice discounting 18
19. Managing Income and
Expenses
Creditor management
• Negotiation of extended credit terms
• Reduction of stock
• Leasing vs. buying an asset
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20. Optimisation of Cash Flow
• Optimisation of working capital
◦ Larger loan amounts when required
◦ Customers paying within credit terms
◦ Investors infusing money in the
business
• Decrease expenses
◦ Lower interest rates on loans and
premiums on insurance
◦ Better credit terms with suppliers
◦ Better lease rates on assets
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21. Sensitivity Analysis in Cash Flow
Forecasts
• Assumptions for analysing potential
effects of changes to forecasts
• Historical data on late payments
and/or bad debts used to analyse
different levels of debtors
• Analysis of results and identification of
risks associated
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22. Summary
• Cash is King! Without it, no company
can survive
• Credit management practices have a
direct impact on cash
http://www.morebusiness.com/running_your_
business/profitability/Business-Cash-Flow.brc
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