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Controlling cash flow for business growth


Brief Case

Introduction A retail business buys 400 of stock and sells it on credit for 600

Profit & Loss Account Cash Flow Statement


CIMA (the Chartered Institute of Management
Accountants) is the worlds leading body of
management accountants. Management Revenue 600 Cash Inflow 0
accountants make sure firms are competitive by Less Cost of stock 400 Less Cash Outflow 400
predicting the future based on current figures. Profit 200 Net Cash Flow (400)
This study looks at how management (Revenue minus Cost) (Inflow minus Outflow)
accountants forecast, monitor and control cash
flow to maintain businesses financial health. Although the transaction has made a 200 profit, until the credit
is paid, the business has a negative net cash flow of 400.

The importance of cash flow


Cash flow is a vital focus for a business. No those that are easy to turn to cash, for instance,
business can survive long without enough cash to money in the bank or stock. Assets such as
meet its needs. Cash comes into the business buildings are the least liquid. To control cash,
(cash inflows), mostly through sales. It flows out management accountants must:
(cash outflows) to pay for costs. The difference make sure enough cash is on hand for
between the two is net cash flow. This is either: investment
positive - when more money is received than is check there are procedures to chase debts
spent, so bills are paid on time control different levels of cash outflows.
negative - when less money is received than is
spent, so money may need to be borrowed. If a business has cash problems, suppliers may
not be paid. It may find trading more difficult and
The amount of available cash in a business is put its reputation at risk. It may also be harder to
known as a liquidity position. Liquid assets are obtain credit or pay wages and retain staff.

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CIMA BRIEF 29/7/10 16:38 Page 2

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The cash flow cycle Cash Flow Forecast Jan Feb March April

Cash inflow
For a retail business, the main cash inflows come
from sales. The main outflows come from Receipts 8,000 7,000 10,000 10,000

supplies and fixed costs, such as rent, wages or Total Inflow 8,000 7,000 10,000 10,000
transport. If there is: Outflow
too much cash it needs to be put to work, Payments 16,000 14,000 7,000 7,000
i.e. invested to earn interest and avoid loss of
Total Outflow 16,000 14,000 7,000 7,000
earnings
Net cash flow (8,000) (7,000) 3,000 3,000
too little cash businesses need to know how
much to borrow and for how long. This also
incurs costs (i.e. interest) which must be Opening balance 10,000 2,000 (5,000) (2,000)

managed. Closing balance 2,000 (5,000) (2,000) 1,000

(Opening balance
An effective management accountant will forecast + Net cash flow)

flows and balance the cash flowing in with that


flowing out. They need to make informed Benefits of effective
choices, with knowledge and training. management accounting
Good cash flow management can save businesses
Managing cash flow
and safeguard jobs. This is even more vital in a
Management accountants forecast, monitor and downturn. At this time, it can be hard to access
control cash flow using key indicators, e.g. sales capital, receive client payments or be costly to
trends. A business can improve cash flow by: borrow. A careful cash flow forecast will predict
using assets these problems. This allows time to prepare.
making sure low interest is being paid on
Conclusion
borrowings
agreeing payment dates with suppliers Although a business may be making profit, it can
not offering discounts for early payment. still fail with poor cash flow. The future of business
is unsure. Management accountants take all
Businesses that make profit have extra cash to events into account and monitor and predict
cover times of shortfall. Management accountants trends. They prepare for change and help strategic
ensure plans are in place for any shortfalls. planning. This keeps the business in profit.
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