Chapter 20-Business

Cash-flow forecast

an estimate of the future cash inflows anp outflows of a business.

Why is a cash flow forecast important

Without it, the business will not be able to pay:

its employees' wages

■ its suppliers for goods and services

■rent, heating and lighting and other costs for its premises.

Net cash flow

cash inflow - cash outflow.

Closing balance in a cash flow forecast

The closing balance in the cash-flow forecast shows how much cash the business expects to have at the end of each month.

If the closing balance is forecast to be negative then this tells management that the business will have a cash shortage.

Short-term cash-flow problems 

There are several ways a business can overcome a short-term cash-flow problem. It can:

ask trade receivables to pay more for goods more quickly by offering discounts to customers who have been sold goods on credit

negotiate longer credit terms with suppliers 

delay the purchase of non-current assets until the cash flow improves

find other sources of finance for the purchase of non-current

Working capital

measures the liquidity of a business

Liquidity

the ability of a business to pay its short-term debts.

Working Capital Cycle

The Working Capital Cycle (WCC) is the time it takes for a business to convert its net current assets (working capital) into cash.

it’s how long it takes for a business to:

1. Buy inventory (raw materials or goods),

2. Sell those goods,

3. Collect cash from customers,
   and then use that cash to buy more inventory.

The length of the working capital cycle depends on:

the level of inventories held by a business and how quickly suppliers are paid

how long it takes to produce goods for sale

how quickly the business finds buyers for its products

the length of the credit period customers are given - credit

How can a business improve its working capital?

A business can improve its working capital by:

reducing inventory levels

negotiating longer credit terms with its suppliers

reducing the amount of time it takes to receive payments from customers who have been supplied goods on credit terms