Managing Cash Flow

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Managing Cash Flow

Learning Objectives
1. Explain what cash flow means
2. Understand the cash flow cycle and
importance of cash flow to a business
3. Identify major causes of cash flow problems
4. Define strategies to improve cash flow
5. Gain knowledge on eliminating waste to
improve cash flow
6. Learn how to forecast cash flow
NOTE: This is a PARTIAL
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Program Outline
1. Introduction to cash flow
2. Causes of cash flow problems
3. Strategies to improve cash flow
4. Improving cash flow through waste elimination
5. Cash flow forecasting

Introduction
• Managing your cash flow is vital for business
survival and growth
• To run your business effectively, you need to
balance the timing and amount of your
expenses with those of your income
• This guide explains the various areas you need
to consider when managing and improving cash
flow in your business

What is Cash Flow?
• Cash flow is the flow of money in and out of the
business
• A business needs cash
 Gives ‘immediate spending power’
 Needed to pay bills and expenses such as rent, taxes,
wages, suppliers etc.
• Without enough cash in the business, bills
cannot be paid and the firm will be forced out of
business

What is Cash Flow?
• Negative cash flow
 This occurs when your cash outflow is greater than
your incoming cash. This generally spells trouble for a
business, but there are steps you can take to remedy
the situation and generate or collect more cash while
maintaining or cutting expenses.
Your
Business
Cash Inflows Cash Outflows
Negative cash flow
(Cash Outflows > Cash Inflows)

What are the Cash Inflows and
Outflows?
Cash Inflows Cash Outflows
• Cash sales • Payments to suppliers
• Receipts from trade debtors • Wages and salaries
• Sale of fixed assets • Payments for fixed assets
• Interest on bank balances • Tax on profits
• Grants • Interest on loans & overdrafts
• Loans from bank
• Dividends paid to
shareholders
• Share capital invested • Repayment of loans

Cash “Flows” Around a Business
The
Cash Flow
Cycle
Stocks
ordered from
supplier
Production
turns
stocks into
products
Customers
pay for their
purchases
Products
sold to
customers
Stock held
until a
customer is
found

Main Causes of Cash Flow Problems
1. Low profits or losses
2. Excess production capacity
3. Excess stock
4. Allowing customers too much credit
5. Overtrading – growing too fast
6. Unexpected changes in the business
7. Seasonal demand

2. Excess Production Capacity
• Spending too much on fixed
assets
• Made worse if short-term
finance is used (e.g. bank
overdraft)
• Fixed assets are hard to turn
back into cash in the short-
term

3. Excess Stock
• Excess stocks tie up cash
• Increased risk that stocks
become obsolete
• However, there needs to be
enough stock to meet
demand
• Bulk buying may mean lower
purchase prices

Cash Flow Forecasting is SO
Important
• The key to cash flow
management is having
good information
• A good cash flow
forecast:
 Updated regularly
 Makes sensible
assumptions
 Allows for unexpected
changes
-40
-30
-20
-10
0
10
20
30
40
50
60
Jna Feb Mar Apr May Jun
Net Cash Flow

What is Credit Control?
• Establishing credit limits for new customers
• Credit checking new and existing customers
• Setting realistic credit limits
• Monitoring the age of debts and chasing up bad
debts
• Determine appropriate terms and conditions for
credit
• Chasing up debtors will get payment in sooner
but may upset customers

Managing Stocks
• Stock refers to goods purchased and awaiting use or
produced and awaiting sale
• Stocks take the form of raw materials, work-in-progress
and finished goods
• Stockholding is costly and therefore it is sound business
to:
 Keep smaller balances (just-in-time stocks)
 Computerise ordering to improve efficiency
 Improve stock control
• This will cut down the spending on stock but may leave
the firm vulnerable to stock out

Sale of Assets
• Selling spare or surplus
assets is a way to achieve
a short-term boost to cash
flow
• Good examples: spare
land, surplus equipment
• Note – not all businesses
have spare assets

Checklist for Improving Cash Flow
Possible Measures
Assess
Benefits
Tick box
Do Now
Tick Box
1. Sales Related
• Increase sales (particularly those involving cash
payments)
☐ ☐
• Increase prices especially to slow payers ☐ ☐
• Review the payment performances of
customers with sales force
☐ ☐
• Become more selective when granting credit ☐ ☐
• Seek deposits or multiple stage payments ☐ ☐
• Reduce the amount/time of credit given to
customers
☐ ☐

Possible Measures
Assess
Benefits
Tick box
Do Now
Tick Box
4. Credit Management
• Bill as soon as work has been done or order
fulfilled
☐ ☐
• Generate regular reports on receivable ratios
and aging
☐ ☐
• Establish and adhere to sound credit practices -
train staff
☐ ☐
• Use more pro-active collection techniques ☐ ☐
• Add late payment charges or fees where
possible
☐ ☐
• Provide discounts for early payments ☐ ☐

Possible Measures
Assess
Benefits
Tick box
Do Now
Tick Box
7. Financing
• Use factoring or discounting to accelerate
receipts from sales
☐ ☐
• Re-negotiate bank facilities to reduce charges ☐ ☐
• Seek to extend debt repayment periods ☐ ☐
• Net off or consolidate bank balances ☐ ☐
• Defer dividend payments ☐ ☐
• Raise additional equity ☐ ☐
• Convert debt into equity ☐ ☐
• Make medium- and short-term cash flow
forecasts - update regularly
☐ ☐

8 Types of Waste (Manufacturing)
Overproduction
Producing more than what
the customer needs
Inventory
Building and storing extra
products the customer has
not ordered
Transportation
Moving from one
place to another
Defects
Reprocessing, scrap or
correcting work
Over-processing
Adding excess value
when the customer
does not require it
Motion
Extra physical/mental
motion that doesn’t add
value
Intellect
Not using employees full
intellectual contribution
Waiting
Employees waiting for
parts, machine, process or
information
Waste

Waste Elimination & Cash Flow
• Eliminating waste such as overproduction,
excess inventory and defects can improve cash
flow
• Depending on which of the eight waste are
targeted for elimination, the cost savings can
either be:
 Hard savings
 Soft savings
 A combination of hard and soft savings

Waste Elimination & Cash Flow
• Hard savings
 Savings that have a direct impact on cash flow, e.g.
wages, assets and material costs
• Soft savings
 Savings which are intangible with no definite price tag
attached to them, e.g. opportunity costs, productivity
improvement and employee satisfaction
• Benefits
 Benefits can comprise hard and/or soft savings

Overproduction
• It is the worst of the eight waste
• It is the exact opposite of just-
in-time production
• Overproduction means making
what is unnecessary, when it is
unnecessary, and in
unnecessary amounts
• Occurs when you manufacture
items when there are no orders

How to Eliminate Overproduction
• Line balancing
• One-piece flow
• Pull production using kanban
• Quick-changeover operations
• Level-production – small-lot, mixed production

Excess Inventory
• Overproduction leads to inventory
• Inventory means any goods that are
being retained for any length of
time, inside or outside the factory
• Inventory includes raw materials,
work-in-process, assembly parts
and finished goods
• One of the best ways to begin
finding waste is to look for retention
points where inventory tends to pile
up

How to Eliminate Excess Inventory
• U-shaped manufacturing cells, layout of
equipment by process instead of operation
• Production leveling
• Regulating the flow of production
• Pull production using kanban
• Quick changeover operations

Budget versus Forecast
Economic
Challenges
& Business
Risks
The “Budget”
Future
State
Current
State
The “Forecast”

Budget versus Forecast
• Budget is a plan for where a business wants to
go
• Forecast is the indication of where a business is
actually going
• Forecast is a more useful tool than budget as it
gives a short-term representation of the actual
circumstances in which a business finds itself
• The information in a forecast can be used to
take immediate action

Elements of a Cash Flow Forecast
• The cash flow forecast identifies the sources
and amounts of cash coming into your business
and the destinations and amounts of cash going
out over a given period
• There are normally two columns, listing forecast
and actual amounts respectively
• The forecast is usually done for a year or
quarter in advance and divided into weeks or
months

Elements of a Cash Flow Forecast
• The forecast should list:
 Receipts - any money that will come in during that
period
 Payments - any money that will go out during that
period
 Excess of receipts over payments - with negative
figures shown in brackets
 Bank balance at the start of the period
 Bank balance at the end of the period

Net Cash Flow =
Total Inflow (A) – Total
Outflow (B)
Closing Balance (E) is
carried as new Opening
Balance
Closing Balance =
Opening Balance (D) +
Net Cash Flow (C)
Key Formulas:
Closing Balance – Add
opening and net cash
Sep Oct Nov Dec
CASH INFLOW
Cash Sales 6000 6500 8000 11000
Credit Sales 2000 3000 3500 4000
Total Inflow (A) 8000 9500 11500 15000
CASH OUTFLOW
Materials 2500 3400 3600 5600
Wages 4000 4000 4000 4500
Other Overheads 1400 1500 1500 2100
Total Outflow (B) 7900 8900 9100 12200
Net Cash Flow (C) 100 600 2400 2800
Opening Balance (D) 800 900 1500 3900
Closing Balance (E) 900 1500 3900 6700
Example of Cash Flow Forecast
Cash Inflow –
Money coming in
Cash Outflow –
Money going out
Closing Balance – Add
opening and net cash
Opening Balance (2) –
Closing balance from previous
month is carried over
Net Cash-flow –
Difference between
inflows and outflows
Opening Balance (1)
– what is left from the
previous month/ year

Creating & Analyzing a Cash Flow
Forecast
• Create yearly revenue and profitability goals.
• Input actual data into the cash flow worksheet.
• Figure out your net cash flow. Are you making
more than you spend?
• Figure out your average monthly spend.
• Utilize the weekly sales opportunity meetings to
determine which opportunities you need to
close.

Copyrights of all the pictures used in this presentation are held by their respective owners.

About Operational Excellence
Consulting
• Operational Excellence Consulting is a management training and
consulting firm that assists organizations in improving business
performance and effectiveness.
• One of our unique strengths is going beyond a tools-focused
approach to seamlessly integrate people, processes, technology
and continuous improvement initiatives to suit the specific needs
and situations of our clients.
• We provide corporate learning programs and management advisory
services to assist our clients to achieve breakthrough in business
performance and effectiveness. Our aim is to support our clients in
designing, managing and executing lasting beneficial change.

Managing Cash Flow

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