Cash Flow Forecasting and Working Capital

Vocabulary flashcards based on lecture notes about cash flow forecasting and working capital.

Cash Flow

The cash inflows and outflows over a period of time. It is not the same as profit.

Cash Inflow

The sums of money received by a business during a period of time, such as the sale of products for cash, payments made by debtors, or borrowing money.

Cash Outflow

The sums of money paid out by a business during a period of time, such as purchasing goods/materials, paying wages/salaries, or repaying loans.

Cash Flow Cycle

Shows the stages between paying out cash for labor/materials and receiving cash from the sale of goods.

Cash Flow Forecast

An estimate of future cash inflows and outflows of a business, usually on a month-by-month basis.

Net Cash Flow

The difference between cash inflows and cash outflows. (cash inflow – cash outflow)

Closing Cash (Bank) Balance

The amount of cash held by the business at the end of each month. This becomes next month’s opening cash balance. (net cash flow + opening balance)

Opening Cash (Bank) Balance

The amount of cash held by the business at the start of the month.

Overtrading

The firm expanding too fast, which increases cash outflows, but not necessarily with the cash inflows

Strategies to reduce cash outflows

Negotiate with creditors and suppliers to improve trade credit terms. Pay for purchases on trade credit. Opt for leasing capital equipment. Reducing stock levels.

Strategies to increase cash inflows

Raising prices (if possible). Reduce prices to attract customers. Encourage debtors to pay early by offering discounts. Improved marketing. Use a debt factoring service.

Strategies to seek additional sources of finance

Bank overdrafts or bank loans. Secure finance from sponsorships, donations, or financial gifts. Selling shares. Selling fixed assets.