Cash Flow Budgets

1
Cash Flow Budgets
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Lesson Objectives

• By the end of the lesson you should be able to
• Explain the advantages and disadvantages of cash
  flow forecasts.
• Identify causes and solutions of cash flow
  problems.
• Explain the difference between cash and profit.

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Example cash flow forecast.
January February
Cash in
Cash out Wages Stock Building maintenance
Total Outflow
Net Cash Flow
Opening Balance
Closing Balance
12
Add up all the cash going out of the business
The balance taken from the last months closing
balance.
3
Cash coming into the business minus the cash
going out.
Net cash flow plus opening balance.
2
5
10
2
4
6
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Cash Flow Forecasting.

• Advantages
• Helps businesses plan.
• Sets targets.
• Supports fund applications.
• Improves efficiency.

• Problems
• Changes in consumer taste/trends/competition
• Inaccurate market research
• Changes in minimum wages
• Changes in level of spending in the economy

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Causes of Cash Flow Problems
Too Much cash leaving the firm

• Poor inventory management.
• Unanticipated costs e.g. replacing equipment.
• Raw Material Price Increase.
• Increase in payments on debts.

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Causes of Cash Flow Problems
Problems with debtors paying up.
credit sales.
Too Little Cash Coming into the Company
Seasonal demand.
Overtrading.
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Solutions to Cash Flow Problems

• Debt factoring.
• ____________________________________
• Sale and leaseback.
• ____________________________________
• Improved stock management.
• ____________________________________

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Solutions to Cash Flow Problems

• Better debt/credit management.
• _________________________________
• Set up a contingency fund.
• _________________________________
• Review product portfolio if seasonal.
• _________________________________
• Timing your spending carefully.
• _________________________________

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How to avoid cashflow problems

• Ensure you draw up forecasts and act on a
  potential cash flow crisis
• Do not spend until you have the money not always
  practical

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Why are small firms more likely to suffer cash
flow problems?

• Smaller market to rely on
• May only have one main customer
• Can not demand credit terms
• Do not have access to lots of cash inflows
• May have to offer credit to gain the edge over
  competition

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The difference between cash and profit

• Cash flow
• represents money from several sources
• is affected by the timing of payments into and
  out of the firm
• is critical for the firms survival

• Profit
• is the money left over from sales revenue once
  costs have been subtracted
• is calculated before the money is received
• is not critical to the firms survival