Cash Flow Management and Forecasting | Case Study

immediate payment Flow Management and Forecasting Case force fieldCash issue managementCash combine management is the process of monitoring, analyzing and adjusting demarcation bills flows1. Cash is king is the often heard business clich, yet it is borne reveal of creation. It is monitoring of actual capital flows against the hard property flow projections for the period, analyzing the reasons for variation and then implementing the necessary actions to manage business fiscals. Cash flow management is found on notes flow projections which is diffe assume than profit and loss fib and, in times of cash shortage, may be more important (Oxford, 1997).Importance of preparing a cash flow forecastA cash flow forecast shows the projects in flows and out flows of cash in a business. It is an important rotating shaft in cash flow management as it helps to identify the gaps in cash over the intercommunicate period. Lets look at the importance of cash flow forecast for different s canvassholdersproprietor / investor. Cash flow forecast shows the level best shortfall in cash during the projected period and sacrifices view about maximum capital funding is required. affirms / lenders. It helps in analysing the credit worthiness of the business and matches it with lenders appetite for risk. It in any case shows whether business will generate sufficient cash over time to meet repayments.Creditors. If business is non in a strong position, creditors like to see cash flow forecast to analyse whether to give stock on credit and under what terms.Cash flow forecastAnnexure I shows the cash flow forecast for the year ending 31 Dec 2004. It shows minimum cash offset of 0 in February 2004 and is base on the following assumptionsSprint X is a high street sport patronize with no sales on debtor accounts. All sales immediately result in cash in flows.The profits generated be small and hence company pays no tax.The projected slang counterbalance on 3initiatory Dec 2004 is 26,500. This is because Sprint X has yet to make the stock payments of 12,500 for December 04 as these are imputable in January 2004 only.Though the minimum balance is 0 in February 2004, in reality it might be even lower. The intra-month cash position could be even worse because of the followingThe supra cash flow forecast of 0 in February 2004 is based on month end. Monthly rent of 2,500 for March is due on 1st March 2004. So the cash balance on 1st March 2004 could be as low as -2,500.Payment terms and dates of utility providers and suppliers.Payment dates of bank charges.Advantages of using a spreadsheet for cash flow forecastingSpreadsheet software for personal computers is a powerful peckerwood for cash flow forecasting. Its major advantages areArithmetic errors are virtually nonexistent (Horngren, Sundem Stratton, 1998)It is easier to operate and visualise than using professional financial packages. Small business owners dont need to understand financial jargon for building and updating cash flow forecasts.It sheers the tedium of carrying out repetitive calculations. If actual cash flows in a month are different from the projections, it would change the following month end cash flows. Spreadsheet model makes it much easier to update cash flow forecasts.Sensitivity analysis. Spreadsheet cash flow model in like manner makes it more convenient in analysing the impact of variation in different sales and cost elements on the cash flows.Bankruptcy due to cash flow problemsSprint X could go bankrupt if runs out of cash to make payments to its creditors. Creditors can then take force Sprint X into liquidation.Sprint X has to order supplies before it can sell them and once it orders and receives deliveries, it is liable to pay whether or not it is triple-crown in selling them. Based on the cash flow projections in extension I, John and bloody shame expanded the business with 2,500 additional capital for rent payment on 1St March 2004. cipher s ales in twain February and March 2004 are 5,000 less than the budgeted amount. The cost of goods is 60% of sales on average (based on ratio of annual cost of goods to annual sales). Though the cash receipts are lower in February and March, the benefit of lower cash outflows would be seen in March and April only due to one month lag in credit payments.cecal appendage II shows the revised cash flow forecast. Sprint X has a negative cash of 5,000 at the end of February 2004. Even after adding an sign capital inflow of 2,500, the company is no cash to meet full supplier payments for February and rent on 1st March 2004. Under such scenario, both suppliers and landlord can take the company to liquidators.Even though the company may end year with more cash than initial capital inflow, yet its unfitness to tide through emergencies may force it into liquidation.Strategies for effectively controlling cash flow problemsRegular admission of receipts and payments will keep the cash flow updat ed and will give owners sufficient time to take care of shortfalls, if any.Analysis of trends will help in taking timely decisions of cost cutting to reduce cash outflows or to plan for higher sales.Owners shouldnt take out cash from the business based on single months net cash flows. The picture may be perverted due to one month delay in higher stock payments. They should look at the year end figures and maximum cash requirements before taking out any earnings.The company should establish a line of credit with a bank which will not only take care of maximum cash requirements but also leave some headroom for any emergencies.Owners should keep business account separate from personal accounts to get clear cash position of the business.Reconcile monthly bank statements for both deposits made and cheques drawn.Use of financial recording dodging to manage Sprint Xs business financesSprint X should fortnightly look at the sales trends and plan future uptake accordingly. Regularly updat ion of cash flow forecast based on the latest trends will help in planning for any shortfall in funding gap.It should also use financial recording system to keep a tab on inventory to save excess inventory build-up. This will prevent unnecessary goods write-off and losses. Trends in fashion change very fast and a good company should keep an eye on what is selling and what is just occupying shelf space and requiring unnecessary working capital.Appendix I Sprint Xs cash flow forecastJan-04Feb-04Mar-04Apr-04May-04Jun-04Jul-04Aug-04Sep-04Oct-04Nov-04Dec-04Jan-05ReceiptsInvoiced sales15,00020,50035,00035,00035,00020,00020,00020,00020,00020,00020,00020,000015,00020,50035,00035,00035,00020,00020,00020,00020,00020,00020,00020,0000PaymentsStock(3,000)(17,500)(17,500)(17,500)(12,500)(12,500)(12,500)(12,500)(12,500)(12,500)(12,500)(12,500)(12,500)Telephone(1,000)(1,000)(1,000)(1,000)Electricity(1,500)(500)(500)(500)(500)(500)(500)(500)Rent(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,5 00)(2,500)(2,500)(2,500)(2,500)Wages(2,000)(2,000)(2,000)(2,500)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)Bank loan(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(10,500)(26,000)(26,500)(25,500)(21,000)(20,500)(20,500)(21,500)(20,500)(20,500)(21,500)(20,500)(12,500)Net cash flow4,500(5,500)8,5009,50014,000(500)(500)(1,500)(500)(500)(1,500)(500)(12,500)Opening bank balance1,0005,50008,50018,00032,00031,50031,00029,50029,00028,50027,00026,500Closing bank balance5,50008,50018,00032,00031,50031,00029,50029,00028,50027,00026,50014,000Appendix II Sprint Xs cash flow forecast with reduced Feb and Mar salesJan-04Feb-04Mar-04Apr-04May-04Jun-04Jul-04Aug-04Sep-04Oct-04Nov-04Dec-04Jan-05ReceiptsInvoiced sales15,00015,50030,00035,00035,00020,00020,00020,00020,00020,00020,00020,000015,00015,50030,00035,00035,00020,00020,00020,00020,00020,00020,00020,0000PaymentsStock(3,000)(17,500)(14,500)(14,500)(12,500)(12,500)(12,500)(12,500)(12,500)(12,500)( 12,500)(12,500)(12,500)Telephone(1,000)(1,000)(1,000)(1,000)Electricity(1,500)(500)(500)(500)(500)(500)(500)(500)Rent(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)(2,500)Wages(2,000)(2,000)(2,000)(2,500)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)(2,000)Bank loan(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(3,000)(10,500)(26,000)(23,500)(22,500)(21,000)(20,500)(20,500)(21,500)(20,500)(20,500)(21,500)(20,500)(12,500)Net cash flow4,500(10,500)6,50012,50014,000(500)(500)(1,500)(500)(500)(1,500)(500)(12,500)Opening bank balance1,0005,500(5,000)1,50014,00028,00027,50027,00025,50025,00024,50023,00022,500Closing bank balance5,500(5,000)1,50014,00028,00027,50027,00025,50025,00024,50023,00022,50010,000BibliographyHorngren, C.T., Sundem, G.L. Stratton, W.O. Introduction to management accounting, Eleventh Edition, Prentice Hall International, Inc., 1998Oxford (1997) Dictionary of Finance and Banking, Oxford University Press, Second Edition, 1997.1 http//sbinfocanada.about.com/cs/management/g/cashflowmgt.htm