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7 Reasons Why you should Prepare a Cash Flow Projection

Managing your Cash Flow

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Unit Video

Unit Summary

7 Reasons why you should prepare a Cash Flow Projection:
  1. Helpful in Planning
  2. Forecasting the Future needs
  3. Maintenance of sufficient cash Balance
  4. Controlling Cash Expenditure
  5. Evaluation of Performance
  6. Testing the Influence of proposed Expansion Programme
  7. Basis of finance Co-ordination

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Transcript

Hi. In this video, we will learn why it is important to have a Cash Budget.
Cash budget is an important tool in the hands of financial management for the planning and control of the working capital to ensure the solvency of the firm, and thus, ensure that you have enough cash on hand. A business should have at least 90 days of cash on hand to ensure they remain healthy financially.
Here are 7 Reasons why you should prepare a Cash Flow Projection:
  1. It is Helpful in Planning. Cash budget helps planning for the most efficient use of cash when there is a oversupply and what to do when it is low
  2. Forecasting the Future needs. Cash budget forecasts the future needs of funds, its time and the amount well in advance.
  3. Maintenance of sufficient cash Balance. Cash is the basis of liquidity of the enterprise and a Cash budget helps in maintaining the liquidity.
  4. Controlling Cash Expenditure. Cash budget acts as a controlling device of various departments expenses
  5. Evaluation of Performance. Cash budget acts as a standard for evaluating the financial performance.
  6. Testing the Influence of proposed Expansion Programme. Cash budget forecasts the inflows from a proposed expansion or investment programme and testify its impact on cash position.
  7. Basis of finance Co-ordination. Cash budget helps in coordinating the various finance functions, such as sales, credit, investment, working capital etc.

Case Study

“Rose Soaps” had just received the biggest order for the year to be delivered to Western Retailers in two months’ time. Due to the size of the order and the cost of materials needed to produce the product, the Finance manager had to sit down with the Production manager to see the financial requirements at each weekly and monthly intervals with the suppliers. With this information, the Finance manager was able to incorporate this information into the Cash Flow report, so that he is aware as to how much Cash is required to be available in the bank accounts at the end of every week and month so that the payments to the suppliers would be met. At the end of the first month, the report showed that Rose Soaps will be in shortage of cash. In order to cover this shortage, the Finance manager was able to negotiate with a few clients to settle their invoices within 10 days by providing them with a special 7.5% discount. As the margins on the large order to Western Retailers is 37%, providing the 7.5% discount was the correct decision to make so as to be in a position to settle all the required payments, and not to jeopardize the deal with Western Retailers.

Quotes

Money should not, and must not, change our commitment to solving problems and building this state. Dave Freudenthal