Financial Management: Module 5 Cash Flow Management Produced in conjunction with

1. Financial Management: Module 5 Cash Flow Management Produced in conjunction with The African Entrepreneur Collectiveand Opportunity International www.oppteachers.org

2. Learning Objectives By the end of this section you will be able to: • Understand why cash flow management is crucial for the success of your business • Explain what is measured as cash flow and how it differs from profit • Identify specific strategies for improving cash flow by managing debtors, creditors, and inventory

3. Recap: Module 4 • The Balance Sheet • The Trial Balance • Adjustments to the Trial Balance

4. Recap: cash basis vs accruals basis of accounting Cash Basis Accounting When cash actually changes hands vs. Accrual Accounting Record transactions when they occur, even if no cash changes hands

5. Why do we need to look at cash flows? • Cash is king! • Cash is the lifeblood of a business • It’s available cash that is needed to sustain a business from day-to-day.

6. What Is Cash Flow? • The three components of cash flow: • Funds on hand at the beginning of any period • Funds received and spent during an ensuing period • And the funds remaining at the end of that period

7. Cash Is NOT Profit “Are you sure I made a profit”? I have less money now than at the start of the year • Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or other trading period. • Cash is the amount you have on hand to pay debts. • You can be showing a good profit on the books but have a small cash balance to cover immediate debt.

8. What’s Measured In Cash Flow?

9. Cash Inflow/ Outflow

10. Cash Inflows And Cash Outflows • Income and expenditure cash flows rarely coincide BUT you must always be in a position to meet your scheduled payments • This means there can be times when you could simply NOT have enough ready cash to meet your commitments • Cash flow management is about speeding up the inflows and slowing down the outflows

11. Key Requirements Of Your Cash Flow • Cash flow should have three characteristics: • Positive • Available • Timely • This will not happen automatically – it requires planning!

12. Practice question 1: Which of these situations represents good cash flow management? • Debtors (Accounts Receivable) are greater than Creditors (Accounts Payable) • Cash coming in is greater than cash being paid out and you have a large cash in bank balance • You have just made a big sale but won’t receive the money for 6 months

13. Managing cash flows The next few slides will talk about some of strategies you can use to manage cash flows, focusing on: • Debtors • Creditors • Inventory

14. Debtors Management Control Debtor days = average number of days it takes to receive cash from a debtor Reducing debtor days • Define a credit policy that clearly sets out your standard payment terms • Consider offering discounts for prompt payment, or charging penalty interest for late payment • When you land a large contract or sale, negotiate deposits or staged paymentsrather than a single large payment at the end • Keep track of invoices that are overdue and monitor them regularly • Assign a person with responsibility for managing debt collection

15. Creditors Management Control • Negotiate for delayed payment: for example, if you make a regular order with suppliers, ask if you can pay in cash 30 days later • If you place a large order for supplies, ask if you can have them delivered in smaller batches • If a supplier delivers late or not at all, consider charging them for the cost of the delay

16. Inventory/Stock Management The principal factors that need to be considered in determining the optimum levels of inventory include: • Projected sales levels • Availability of raw materials/stock • Lead time required by suppliers • Length of production process • Efficiency of distribution

17. Cash Flow Strategy: Manage Assets • How is it possible for a business to be making profits and yet have a negative cash flow position? • This can be caused by large fixed asset purchases • To avoid this situation, you should try to finance your operations out of working capital • If your business needs to purchase an expensive machine or other fixed asset, match repayment period to the expected lifetime of the equipment

18. Dealing with a cash flow emergency • Two common ways in which many businesses get over a cash flow crisis include: • Borrowing • Putting more of the shareholder’s money into the business. • These are acceptable for coping with short term emergencies, or to fund growth in line with your business plan, but shouldn't form the basis of your cash strategy

19. Practice question 2: Which of the following can be used to manage cash flows? • Borrow more money from the bank • Sell more products on credit • Buy more products on credit

20. Practice question 3: Which of these is an indicator of potential cash flow problems? • High levels of stock which is not being sold • A large debtor who has not yet paid • Very little cash in the ‘cash at bank’ balance • All of the above

21. In the final module… We will look at techniques for budgeting and forecasting, and understand why it is important. We will understand how you can use these tools to improve your business.

22. End of Financial Management: Module 5 Cash Flow Management To continue your learning experience, visitwww.oppteachers.org