Forecasting and managing cash flows
Cash-flow forecasts
- A cash-flow forecast predicts the cash in and out each month, so a shortage is spotted early.
- cash inflows — money in (mostly sales); cash outflows — money out (wages, rent).
$$\text{net cash flow} = \text{cash inflows} - \text{cash outflows}$$
- opening balance + net cash flow = closing balance (which becomes next month's opening balance).
Practice
Cash inflows are 25,000 and outflows are 18,000. What is the net cash flow (in dollars)?
Net cash flow = inflows − outflows = 25,000 − 18,000 = 7,000.
Practice
The opening balance is 4,000 and net cash flow is 7,000. What is the closing balance (in dollars)?
Closing balance = opening balance + net cash flow = 4,000 + 7,000 = 11,000.
Fixing cash-flow problems
- Causes: too many credit sales, too much stock, buying too many assets at once, overtrading.
- Fixes:
- bring cash in sooner (faster payment, discounts),
- delay cash out (longer trade credit),
- arrange an overdraft or short loan,
- hold less stock.
Practice
Which improve a firm's cash flow? (Choose all that apply.)
Collecting sooner, paying later and holding less stock all help; buying lots of assets at once drains cash.
You've got it
Key idea
- a cash-flow forecast warns of shortages early; net cash flow = inflows − outflows
- opening + net cash flow = closing balance
- fix cash flow: collect sooner, pay later, overdraft, less stock; beware overtrading