Question

600 -800 words.

In your own words explain why cash flow budgets are useful to business leaders. Explain in details with examples.

Answer 1

Cash flow is as important to a business as blood is to a body and as fuel is to a flying aircraft. Without it, life-support systems fail and the business crashes.

Cash flow is the natural movement of cash that occurs in a business as it buys and sells goods/services and manages its funding arrangements. This movement involves cash coming into a business from activities like sales, investments and loans and cash leaving the business via activities like expense payments, asset purchases, dividends and loan repayments.

For the business to remain viable it must ensure that there is always sufficient funds available to meet the financial obligations of the business, as they become due for payment. The trouble is that the timings of the cash-in does not always neatly align with the timing of the financial obligations. If a business cannot meet its financial obligations as they become due for payment, then the business is said to lack cash flow and is deemed insolvent.

The importance of Cash flow planning is linked to liquidity of a business. In any business, there is a need for cash in running day-to-day operations. Some examples include the purchase of office stationary or fuel. Cash flow is simply Cash Receipts minus Cash Disbursements. That means Cash In versus Cash Out. These 'cash needs' of the firm would not be met should a business have its monies tied up in other areas. Examples include: * Credit sales - Having sold goods for n days of credit (ie company to be paid in n days). Credit sales is ok but too much would have effects on the business especially if it is not managing its cash flow. * Assets - Purchases of assets like buildings and machinery must be checked against the cash flow management capacity of a firm given that they would become cash flow burdens to the firm after a purchase. To sum up, liquidity of a business is determined by its cashflow. The cash flow of a business determines its capacity to make certain business decisions. Hence, its importance to a business and business planning.