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Understanding Cash Flow Projections

Understanding Cash Flow Projections. Mona El- Chami , Senior Financial Management Specialist World Bank November 2013 Tripoli, Libya. Importance of Money. Why Money is so important? Almost 2/3 of all small businesses experience money problems

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Understanding Cash Flow Projections

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  1. Understanding Cash Flow Projections Mona El-Chami, Senior Financial Management Specialist World Bank November 2013 Tripoli, Libya

  2. Importance of Money • Why Money is so important? • Almost 2/3 of all small businesses experience money problems • 1/5 of small business managers reported that cash flow is a continuing problem • Differences are important • Represents the lifeblood of the business, and knowing how to use it can make the difference between boom and bankruptcy

  3. Percentage of Small Businesses that Experience Cash Shortages 1

  4. The Cash-to-Cash Cycle

  5. The Cash-to-Cash Cycle • The cash-to-cash cycle of a pushcart vendor is only a few hours; construction projects may take years to complete • Many small businesses experience difficulty because: • The mismatch in time between receiving and spending cash • Mismatch in time between size of payments received and size of payments to be made

  6. Managing Cash Flow • Cash can come from only three sources: • Cash can be obtained by selling products and services • Cash can be obtained from investments the business has made • Cash through financing (Grants and Loans)

  7. How to Better Manage Your Cash Flow • Measuring cash flow • Prepare cash flow projections for next year, next quarter and, if you're on shaky ground, next week • accurate cash flow projection can alert you to trouble well before it strikes • Managing Payables • Surviving shortfalls

  8. Using a cashflow forecast/Projection

  9. Project Cash Flows The definition, identification, and measurement of cash flows relevant to project evaluation.

  10. What is ‘cashflow’? • The flows of money into and out of the business • Money flows inthrough revenue sales of service or product (in our case, cash received from the WB) • Money flows out when wages and expenses are paid or assets are purchased.

  11. Managing Your Cash Flow • Cash-flow forecast will help you predict the amount of money that will be coming into and flowing out of your business • Take these steps to ensure your business will maintain its positive cash flow • Know what to expect • Predict and plan for the slow times • Make projections for the future

  12. The principle of “cashflow” • More money IN than OUT = cash flow positive. BUT high surplus of cash should be avoided in non-interest bearing account) • More money OUT than IN = cash flow negative. Can mean shortage of cash to pay invoices The aim is to have a positive cash flow or at least a balance.

  13. The principle of cashflow Revenue in Expenses out

  14. Inflows Inflows = money received from • Customers (NA) • Local and national government • Sale of property or equipment (NA) • Loans/Grants

  15. Outflows Outflows= money spent by the business on • Wages and salaries for staff • Contracts (Construction & Consultants) • Gas, electricity, water and telephone • Rent and business rates • Interest on loans • Equipment purchases

  16. Forecasting cash disbursements: • Estimates of expenses • Knowledge of your business’s payment patterns • Predict how much and when cash should be paid out • Need to know how much money we will have on the first day of the year to put together a cash budget for the first quarter

  17. A basic cash flow diagram

  18. Several strategies that will provide savings in cash outflows: • Control of the timing of paying out cash • Timing of purchases • Negotiation of terms with suppliers • Use of temporary agencies • Non-cash employee incentives

  19. Techniques to decrease cash outflows: • Two factors of cash outflows that must be controlled: • The amount of cash being paid out • The timing of cash being paid out • Waste also affects cash outflow

  20. In Review • Managing cash flows is the most important and most difficult task faced by managers • Revenue (cash to be received) and expenses are used to predict the amounts and timings of cash outflows primarily through the budgeting process

  21. Thank You!Q&A For any further question or follow up, you can contact me at melchami@worldbank.org

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