FIN 521 Lecture Notes - Cash Flow

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Published on 16 Jun 2012
School
Ryerson University
Department
Finance
Course
FIN 521
Professor
Introduction to cash flow management
In an ideal world, a business will experience a consistently positive cash flow i.e. the amount of cash
coming into the business (cash inflow) is greater than the cash going out of the business (cash outflows)
This would allow a busness to build up cash reserves with which to plug cashflow gaps, seek expansion
and reassure lenders and investors about the health of the business.
However, it is important to note that income and expenditure cashflows rarely occur together, with
inflows often lagging behind.
An important aim of effective financial management must be to speed up the inflows and slow down
the outflows.
Cash inflows
The main cash inflows are:
payment for goods or services from customers
receipt of a bank loan
interest on savings and investments
shareholder investments
increased bank overdrafts or loans
Cash outflows
The main cash outflows are:
purchase of stock, raw materials or tools
wages, rents and daily operating expenses
purchase of fixed assets - PCs, machinery, office furniture, etc
loan repayments
dividend payments
income tax, corporation tax, VAT and other taxes
reduced overdraft facilities
Many of the regular cash outflows, such as salaries, loan repayments and tax, have to be made on fixed
dates. A business must always be in a position to meet these payments, to avoid large fines or a
disgruntled workforce.
To improve everyday cashflow a business can:
ask customers to pay sooner
chase debts promptly and firmly
use factoring
ask for extended credit terms with suppliers
order less stock but more often
lease rather than buy equipment
improve profitability
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Document Summary

In an ideal world, a business will experience a consistently positive cash flow i. e. the amount of cash coming into the business (cash inflow) is greater than the cash going out of the business (cash outflows) This would allow a busness to build up cash reserves with which to plug cashflow gaps, seek expansion and reassure lenders and investors about the health of the business. However, it is important to note that income and expenditure cashflows rarely occur together, with inflows often lagging behind. An important aim of effective financial management must be to speed up the inflows and slow down the outflows. Payment for goods or services from customers receipt of a bank loan interest on savings and investments shareholder investments increased bank overdrafts or loans. Purchase of stock, raw materials or tools. Purchase of fixed assets - pcs, machinery, office furniture, etc. Dividend payments income tax, corporation tax, vat and other taxes reduced overdraft facilities loan repayments.

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