CASH FLOW

JW Int2

JW Int2

What Is A Cash Budget?

• All businesses need to monitor their LIQUIDITY i.e how much money the business has in order to pay off its debts.

• It is necessary therefore that a business prepares a plan for the year ahead to ensure its liquidity.

A cash budget provides the business with a detailed financial plan of action for a future period

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• A CASH BUDGET shows the amount of money that is likely to come in to the business and how the money will be spent over the coming months/years.

•It shows all future inflows of cash and all future outflows of cash.

• A bank will be more willing to grant a business an overdraft or a loan to a business which can produce a cash budget

JW Int2

april may june

OPENI NG BALANCE 100 111 6

add income

cash sales 20 40 25

credit sales 35 30 20

TOTAL I NCOME 155 181 51

Less expenses

purchase of equipment 0 120 0

purchase of stock 14 18 20

petrol 2 5 8

administration 3 7 5

wages 20 20 23

rent 5 5 5

TOTAL EXPENDI TURE 44 175 61

CLOSI NG BALANCE 111 6 -10

CASH FLOW FORECAST FOR SUE PREME

(APRI L TO J UNE) CASH AT START OF MONTH

CASH AT END OF MONTH

Example of a Cash Budget

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Why Do Businesses Prepare Cash Budgets?

• Provides the business with greater control over its financial position and performance.

• Targets are set which provides everyone with a common goal to work towards.

• There is less uncertainty about what will happen in the future.

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Why Do Businesses Prepare Cash Budgets?

• Any difficulties can be anticipated eg. if the business have identified a cash shortage in a particular month then they can ask the bank for an overdraft to provide the cash needed.

• Management are in a position to make informed decisions about new projects eg. whether to buy a new piece of equipment.

• Management may choose to lease rather than buy based of the information in the cash budget

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Cash flow problems•Even successful businesses can have cash flow problems.

•Many profitable businesses go into liquidation because they fail to manage cashflow effectively

The following need to be taken into account:

•TheTiming of money flowing in and out the organisation is of vital importance

•Companies need to make sure that they have enough money to meet their day-to-day needs

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Main Reasons for Cashflow Problems

• Falling sales/seasonal sales• Holding too much stock• Too many credit sales• Not negotiating trade credit with suppliers• The purchase of a fixed asset • Borrowing too much finance at high

interest repayments• Owners taking too many drawings

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DEALING WITH CASH FLOW PROBLEMS• Negotiate

– a bank overdraft if the crisis is temporary – a bank loan if crisis is long-term

• Reduce outflows of cash – find cheaper suppliers– avoid paying invoices too quickly– consider leasing assets rather than buying outright

• Increase inflows of cash– extra advertising to increase sales– make customers pay quicker : credit control or limit

credit sales – Debt factoring of outstanding invoices– selling any unwanted assets