Understanding Cash Flow Projections

Mona El-Chami,Senior Financial Management Specialist

World Bank

November 2013Tripoli, Libya

• 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

Importance of Money

Percentage of Small Businesses that Experience Cash Shortages

1

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

The Cash-to-Cash Cycle

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)

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

Using a cashflow forecast/Projection

Project Cash Flows

The definition, identification, and measurement of cash flows relevant to project evaluation.

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What is ‘cashflow’?

• The flows of money into and out of the business• Money flows in through 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.

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

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.

The principle of cashflow

Cash too high

Cash OK

Cash too low

Revenuein

Expenses out

Inflows

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

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

• 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

A basic cash flow diagram

Jan

USD

Feb

USD

Mar

USD

Apr

USD

May

USD

June

USD

Opening balance

5,000 7,000 4,000 6,000 12,000 15,000

Add inflows

20,000 22,000 18,000 20,000 23,000 18,000

Total 25,000 29,000 22,000 26,000 35,000 33,000

Less outflows

18,000 25,000 16,000 14,000 20,000 33,000

Closing balance

7,000 4,000 6,000 12,000 15,000 0

Cash Flow Forecast - 12 Months

Month: Pre-Start 1 2 3 4 5 6 7 8 9 10 11 12 Totals

Receipts Cash sales 24 32 44 68 92 108 116 88 84 656.00

Collections from credit sales 0

New equity inflow 0

Loans received 0

Other 0Total Receipts 0 0 24 32 44 68 92 108 116 88 84 0 0 656.00

Payments

Cash purchases 50 50 50 50 50 250.00

Payments to creditors 0.00

Salaries and wages 0

Employee benefits 0

Payroll taxes 0

Rent 0

Utiltities 0

Repairs and maintenance 0

Insurance 0

Travel 0

Telephone 0

Postage 0

Office supplies 0

Advertising 0

Marketing/promotion 40 40

Professional fees 0

Training and development 0

Bank charges 0

Miscellaneous 0

Owner's drawings 0

Loan repayments 0

Tax payments 0

Capital purchases 135 135

Other 0Total Payments 135 50 40 50 50 50 50 0 0 0 0 0 0 425.00

Cashflow Surplus/ Deficit (-) (135) (50) (16) (18) (6) 18 42 108 116 88 84 0 0 231.00

Opening Cash Balance 0 (135) (185) (201) (219) (225) (207) (165) (57) 59 147 231 231

Closing Cash Balance (135) (185) (201) (219) (225) (207) (165) (57) 59 147 231 231 231

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

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

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

Thank You!

Q&A

For any further question or follow up, you can contact me at melchami@worldbank.org