Page 3: The cash flow cycle
CIMA-trained management accountants are involved in all sectors of industry - from government departments to well-known names such as Rolls-Royce and Tesco. Each organisation has to manage and monitor its cash flows carefully. Cash does not just arrive; it must be chased, recorded and managed. At all times, there must be enough cash to pay bills. For a retail business like Tesco, the main cash inflows or receipts will be from sales; the main cash outflows or payments will be for supplies and overheads associated with its stores, such as rents, rates, wages, power or transport.
If there is too much cash in any organisation, it needs to be put to work for instance, in a deposit account or investments where it will earn interest. If there is too little, the business needs to know how much it will have to borrow to cover the shortfall and for how long. Borrowing money also has costs which need to be managed. Good cash flow management requires good information, professional training and good management decision making.
CIMA-qualified management accountants learn to forecast flows of cash so that such problems do not arise. A basic cash-flow forecast might look like the example shown. For a business the size of Tesco, the figures are likely to be in millions of pounds.
In this example:
- The opening balance is the amount carried forward from the last period. In January this is £10,000, in February £2,000 and by March is a negative balance of £5,000
- Receipts are inflows from, for example, sales, interest on investments, payment of outstanding customer accounts
- Payments show amounts coming due e.g. rents, tax payments, interest on loans, supplier contracts etc
- Net cash flow shows the cash position forecast for that month. In both January and February this is negative, so this would ring warning bells.
- The closing balance forms the opening balance for the next period.
Cash flow management is about forecasting these flows and balancing the cash flowing in with that flowing out.