Chapter 2 – Cashflow Management

Publisher Summary This chapter focuses on the various aspects of cashflow management. A company's trading performance controls the amount of cash that flows in and out of the business, but the rate at which that cashflow takes place depends on the efficiency with which the company's assets and liabilities are managed. Good management of cash, debtors, creditors and stock helps to minimize working capital requirements and either reduces borrowing costs or releases funds for other profitable investment. The main objective of working capital management is to ensure that sufficient cash is available to meet the day-to-day cashflow needs of the business. The more common weaknesses in managing a company's working capital requirements include failure to prepare cashflow forecasts, or to use and update them on a regular basis once they have been prepared, failure to budget in terms of the balance sheet as well as the profit and loss account, and the failure to control debtors effectively, thus missing the best opportunity for releasing working capital for other purposes. A detailed medium-term cashflow forecast should be prepared to identify when surplus cash is likely to arise and when additional cash is likely to be required. This requires the preparation of realistic monthly forecasts for all items of income and expenditure for a period of at least 12 months. Assumptions made while preparing the forecast should be consistent and clearly thought through, and should be documented for future reference. It is also helpful to incorporate a measure of sensitivity into the forecast, so that the potential effect of unexpected events can be assessed. Bank charges should be subjected to regular monitoring and review and proper controls should be established to achieve an acceptable degree of security over the company's cash resources.