D1 Evaluate how cash flows and financial recording systems can contribute to managing business finances.
Cash flow relates to the amount of money received and spent in a given period. Business can have cash flow problems when the business spends too much money than they receive or because some people who owe them money have not paid their bills when they should. To avoid these problems to occur businesses should make sure they prepare a cash flow forecast. Cash flow forecast is an estimate of the timing and amount of a company’s inflows and outflows of money measured over a specific period of time. This means listing and adding up all their expected cash inflows. This is the money the business expects to receive and pay into its bank account. It then needs to add up its cash outflows which is the money that business expects to pay other to pay to other people or businesses such as loan repayments and wages etc. The difference between these two figures is the cash balance. Cash balance is calculated by subtracting cash outflows from cash inflows. All businesses aim to have a positive cash balance, which takes place when inflows are greater than outflows.
To avoid problems occurring in the business, they can temporarily reduce their expenses for some months or they can arrange overdraft from banks for a short time. They can also chase up any outstanding debts that are owed by customers. The business should always check their cash flows; see if there are any problems occurring and if there is they need to make a quick and appropriate action to deal with the problem. The other thing the business has to keep a look out for is the regular and irregular inflow and outflows. Some inflows and outflows of cash are regular but some of them are not. The business should always aim to keep a regular flow because it makes it much easier to plan and predict cash flow. If in any situation where the inflows and outflows are irregular then the timing is important life for example if there is a large annual payment or a major purchase, it must be planned in advance or it can cause confusion to cash flow. The timing of inflows and outflows are very important. Even a highly profitable business can struggle if inflows suddenly dip at the same time as a very large bill is received.
Some of the situations that affect the timing of inflows and outflows are the late credit payments, seasonal businesses and capital expenditure. Nearly all businesses offer credit to their business customers. The credit system allows the customer to pay for the goods a few weeks after they have received them. The time allowed and the amount of credit may be different depending upon the customer’s credit rating. Usually there will be higher amount of credit and time allowed for customers who regularly place large orders and people who pay off quickly. The credit payment becomes a problem when it turns to late credit payment when some late payers owe large amount of money, which can leave the business seriously short of money. So to avoid this problem some businesses offer discounts to encourage customers to pay quickly and send reminders to customer if payments are overdue through mail or letter. The other way to prevent the problem is to stop supplying until outstanding bill is paid.
Whereas the seasonal businesses are business such as theme parks like Thorpe Park, Alton Towers. These businesses receive their inflows over a short period of time and have to make payments all year round. They will still need to pay the permanent staff. This is why it is important that these businesses have to have strict cash flow management so that income earned during the busy period is invested for meeting routine bills all year round as well as for capital expenditure. The capital expenditure is another type of events which can affect the timing of inflows and outflows. This is the money spending on large items which are expected to last for some time...
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