Financial Management Strategies Cash flow

Transcript:Financial Management Strategies Cash flow:
Financial Management Strategies Cash flow management Cash flow in a business needs to be carefully managed. Cash flow management refers to the way the movement (or flow) of cash from one aspect of the business to another is managed. Initially cash is needed to pay expenses, such as wages, as raw materials are transformed into finished goods. Cash is then locked up in inventory or stock. When those goods are sold to customers, cash is received. The cash can then be used again to pay expenses such as wages. Most large manufacturing businesses sell their products to customers on credit. This means that the customer gets the goods with an invoice attached and will pay the account later. Unless the cash is collected from the customer, it will not be available to pay the next round of expenses! And it is not an easy task to collect debts as they fall due. People want to put off paying. Cash flow statements The first aspect of effective financial planning is to construct a cash flow statement. A cash flow statement predicts the monthly inflows and outflows of cash. An inflow, for example, occurs when goods are sold or customers pay their debts if the goods were sold on credit. An outflow is a payment for expenses such as wages or an insurance premium. It is much easier to predict monthly outflows of cash than inflows. Think about why. However, even inflows can be reasonably accurately predicted on the basis of last year’s sales and sales budgets. This is how a simplified cash flow statement would look. Where do you think the opening balance of $28 000 in January came from? Of course that was the cash in the bank on the 31st December 2014 and it becomes the opening balance for the 1st January 2015. The cash inflows represent income from sales of goods or the collection of customer debts. The outflows represent payments to suppliers and for expenses such as wages, leasing payments, electricity usage and so on. Did you notice the negative closing balances from July to October? Why were sales of ice cream so low from May to August? Obviously it is a seasonal thing - people buy less ice cream in winter. How will Magic Ice Creams Pty Ltd pay their bills in July, August and September? It is most important the managers of this business plan