Cash Flow Management and Budgeting Ch 30

Cash Flow
Cash flow is the sum of cash inflows to the organization minus the sum of cash out flows,
over a specific period. Inflows can arise from cash sales, interest received or disposal of
assets etc. outflows can be caused by cash purchases etc.

Relationship between Cash and Profit

Cash flow and profit are not same. Profit may be affected by non cash items such as
depreciation etc.
 Due to credit sale, there may be any profit in profit and loss account but in reality
we have not same cash because we have to collect it after a certain period.
(See 1st activity on Page 459)

Managing Cash flow

Business must ensure that there should be enough cash for its immediate spending.
However it should avoid too much cash holding. Managing cash flows depends that how
efficiently we manage debtors and creditors.

Cash Flow forecasts

Cash flow forecasts are a detailed estimate of a firm’s future cash inflows and out flows.
(See Table 30.1 on page 460)
 Benefits
 If forecasted cash flow is in negative, managers can take necessary actions
before time to avoid such a situation by managing sales and purchase terms and
conditions.
 It can be helpful to raise finance by loans etc.

Dealing with Cash flow Problems

 Reducing or delaying expenditures
 Using cheaper material
 Delay payments to suppliers
 Short term loans
 Debt factoring
(For advantages and disadvantages see page 463 table 30.2)