Question

The ability to forecast the upcoming needs is important - but probably the most important, yet often overlooked need is that of cash. In business it is important that you have the raw materials, labor, capacity, sales, etc. to perform your functions as a business - but if you do not have cash when you need it, then you will have major problem. Many times we do this intuitively - I know every year approximately how much I will owe the IRS for federal taxes due in the middle of April, so I plan to have cash at the ready. However, many expenses in our lives 'pop' up - like a car problem that cost hundreds/thousands of dollars - how will we deal with these crises when they happen?

What examples do you have in forecasting for cash needs?

Answer 1

One of the important feature of financial planning is to determine the requirement of funds for the business. One of the best ways to deal with the cash problems is to get good at cash flow management. Cash flow is the amount of cash, money coming into the business. There are two ways of cash flow that is positive and negative.As the name indicates, positive cashflow means more money coming into the business and negative means less money is coming or money is going out of the business.

As cash flow management helps in prediction of future expenses and losses and by predicting the expense in future we reserve some amount of money for that expenses which ultimately reduce the cash crisis in future.

When we prepare cash flow two things happened either cash come in that is cash inflow or cash go out that is cash outflow. While preparing cash flow you determine all ur expenses and income and then find out how much cash the person has. Through cash flow management plan the future expenses.

Cash flow management helps in maintaining liquidity. For example, in next month you don't have sufficient cash to pay to your creditors then by knowing that in advance either increase the credit period or take short term loan.

Examples needed for forcasting cash :

Cash can come into business through primary source that is sale of goods and services and cash outflow happened by purchasing any goods or acquiring services.

Cash inflow happened through new loans and investment and cash outflow take place by repayment of any loan.

Cash inflow take place on sale of any asset that is sale of land, building etc. cash outflow take place when we need to make payment for disposal of any asset.

While issuing new share, bonds cash will come into the business and through buy back the cash will go out of the business.

While preparing cash flow one thing must consider that the activities related to operating activities comes under Cash flow from operating activities, activities related to investing that is purchase and sale of any asset come under the respective category and the activities related to finance come under financing activity.