cash flow forecasting and working capital

define cash flow

it is the cash inflow and outflow over a period of time

why is cash important

to pay wages, landlord and suppliers

production will stop without wages

forced into liquidation to pay off debts

define cash flow forecast

estimated future cash inflows and outflows usually done on a month-by-month basis. It usually shows the expected cash balance at the end of each month.

what is the importance of a cash flow forecast

see how much cash will be available to pay bills, buy NCA and repay loans.

see how much cash the bank needs to lend in order to avoid insolvency.

see if it has too much liquid cash and if so put it to use.

uses of cash flow forecast

starting a business

managing cash flow

keep bank manager informed

run an existing business

methods to overcome cash flow forecast in the short term

increasing bank loans

delaying payments to suppliers

lowering TR payback time or sticking to cash sales

delay/cancel purchase of equipment

disadvantage of taking out more bank loans to fix CF

interest needs to be paid so profit decreases

needs to be repaid eventually so cash outflow

disadvantage of delaying payments to suppliers to fix CF

suppliers my refuse to supply

offer less discounts

disadvantages of not buying machinery to fix CF

lowers long term efficiency of the business due to outdated equipment

disadvantages of reducing trade credit/cash sales only to fix CF

consumers might switch to competitors who offer trade credit

formula for working capital

CA - CL