Cash flow in business determines the movement of money in and out of business. It acts as an informative tool for business personals like managers, creditors and investors. Cash flow accounting helps in notifying the company on factors such as liquidity, solvency, it’s value and market position. Thus, a company needs to maintain a positive cash flow in order to fulfill various financial commitments.
A business requires to prepare cash flow in order to:
1. Give prior intimation on any shortfalls in cash balances
2. To check on the affordability of the company to pay employees and suppliers
3. To keep a tap on customer payments
4. For management of business finance as it paves a way for financial planning
5. Provides a detailed report for outside stakeholders like banks
Cash flow forecasting is thereby an essential aspect for business and hence it is necessary to understand the nature of implementation:
Being one of the major affecting factor in cash flow, forecasting receivables is essential for the smooth functioning of an organisation. Forecasting accounts receivable helps to determine the the amount of cash expected to be collected and bad debt expense.
This type of forecasting helps to make an estimation of the cost incurred for purchase of goods. Cash outflow aims to calculate the cash expenses made on administrative and operational works. A few other expenses include purchase of assets, loan repayments, payments needed to be made to owners, investment of funds.
Contingency planning in cash flow helps the business to duck any cash shortage. It makes prediction of any expected reactions and outcomes and thereby makes one business ready to face the future business interruptions.
A standard business plan aims to make a proper projection of cash flow as it gives a clear picture of profit, loss and the balance left. This provides a precise prediction of requirement of money at an early stage. This plan allows to cover the flow of cash in sales on credit, payables, receivables and inventory.
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