TOPIC 3.

7 CASH FLOW
LEARNING OUTCOMES:
Prepare a cash-flow forecast from given information.
Evaluate strategies for dealing with liquidity
problems.

CASH FLOW FORECAST

It is a forecast of inflows and outflows of cash that helps to

diagnoses the future shortages or surpluses, consequently,

requires planning the investment of surpluses and the way to
cover the shortages.

This tool allows optimal liquidity management and avoid

serious problems for lack of it.

Insolvency could lead to bankruptcy and creditor intervention,

especially in times when the resource more scarce and
expensive is cash.

It is easier for a company to fall in bankruptcy for lack of

liquidity than for lack of profits.

What is liquidity?

MINIMUM BALANCE TO MAINTAIN

You must retain cash to certain number of days of
expenses that might occur.

The number of days (8, 30 or other) depends on the

certainty you have on the cash inflows.

You can also determine an "x" number of days of sales.

EVALUATION OF CASH MANAGEMENT

Analyze the age of the balances of suppliers: a large
proportion of overdue balances indicates poor cash
management.

Evaluate the cost of loans that have been requested

under pressure, caused by poor planning and
mismanagement of cash.

Calculate the ratio of the cost of holding cash, with the

total cash used. An increase indicates mismanagement.

FORMAT FOR CASH FLOW

FORECAST

CLARIFICATION OF TERMS
Difference between cash and profit.
Cash inflows (receipts) is different of sales.
Cash outflow (payments) is different of expenses.

CASH INFLOWS (RECEIPTS)

Sales in cash.
Collection of accounts or documents.
Collection of interest and dividends.
Cash sales of fixed assets.
Bank discount of collectible documents.
Issuance and sale of bonds.
Cash sale of shares.
Discount of accounts receivable (factoring).
Contributions of capital.

CASH OUTFLOWS (PAYMENTS)

Payroll and operating expenses.

Purchase of materials or goods for cash.
Interest payment.
Payment of accounts payable.
Payment of documents payable.
Payment of taxes.
Payment of dividends.
Asset purchases in cash.

CAUSES OF CASH FLOW PROBLEMS

Overtrading.
Investing too much in fixed assets.
Overstocking (Stockpiling).
Allowing too much credit / Poor credit control.
Taking too much credit.
Overborrowing.
Underestimating inflation.
Unforeseen expenditure.
Unexpected changes in demand.
Seasonal factors.
Poor financial management

STRATEGIES TO SOLVE LIQUIDITY

PROBLEMS
Good or bad liquidity depends on all areas of the
company, not only treasury or finance.
To increase liquidity should be implemented in all areas
a program that seeks the following objectives :
Reduce cash outflows:

Negotiate more favorable prices.

Accept only good quality items and return the
defectives promptly.
Eliminate lines or products without potential
Reduce the number of models and colors.
Maintain optimal inventory levels.

STRATEGIES TO SOLVE LIQUIDITY

PROBLEMS
Delaying cash outflows:
Avoid premature purchases.
Negotiate shipments that match the production schedule.
Ask the provider to have his warehouses near our plant.
Get longer payment deadlines.
Request material on consignment.
Increase cash inflows:
Increase sales prices (if the market allows)
Improve product quality.
Charge interest on overdue debts.
Increase rotation sacrificing margin.
Improve the mix of product lines.

STRATEGIES TO SOLVE LIQUIDITY

PROBLEMS
Bring forward cash inflows:
Preferably, sell for cash.
Bill instantly.
Negotiate progressive fees depending on the progress of
work.
No errors or incorrect billing in shipments.
Pay commissions on the amount collected, not the sales.
No fill new orders if there are overdue balances.

Keep assets moving:

Store products in warehouses near high-volume customers.
Accelerate the recovery of advances to customers.
Eliminate unprofitable or unwilling to charges customers.

STRATEGIES TO SOLVE LIQUIDITY

PROBLEMS
Liquidate idle resources:

Eliminate or reduce unprofitable lines.

Sell out obsolete inventories.
Identify and sell out machinery that is not being
used.
Evaluate models and designs to eliminate
unnecessary.