Cash Flow and Cash Budget

Cash flow (the amount of cash in a business) has to be carefully monitored.  Businesses that do not have a healthy cash flow can face problems.

Cash flow problems

Cash flow problems can arise even if the firm is successful in selling a lot of its goods.  Poor cash flow can be caused by:

• Spending too much money on stock that has not sold
• Giving customers too long to pay their debts
• Not receiving enough money from sales
• Not having enough time to pay bills from suppliers
• Owners taking too much money out of the business (drawings)
   
  Methods of improving cash flow
   
  There are many ways in which organisations can improve their cash flow.  Some of these include:
   

• Looking for cheaper supplies of raw materials as this would reduce the variable costs of making a product.
• Offering discounts to customers who pay on time, as this will encourage them to pay more quickly.
• Taking out bank loans.  Small organisations can get a loan from friends or partners.  By doing this, the organisation will get an inflow of cash but repayments (including interest) will have to be made regularly.
• Selling equipment or machinery no longer needed as this will bring in cash that can be used to fund other activities.
• Spreading purchase costs – hire purchase or leasing.  This will mean that the outflow of cash will not be in one month but will be spread over a number of months.
• Tight stock control – ensuring capital is not tied up in too much stock.  This will help to keep the outflow of cash to a reasonable level.
   

Cash Budgets

A cash budget contains a list of cash the business expects to receive (receipts) and the cash expected to be paid out of the business over a period of time (payments). 

The benefits of preparing a cash budget are:

• It shows if the business will have a surplus (more cash expected to come in than will go out) or a deficit (more cash going out than coming in).
• It can show if additional finance is required, e.g. overdraft or a loan.
• It can help control expenses by highlighting periods when expenses could be high.
• It can help in making decisions.