Months Cash Flow Forecast: April to September
April
May
June
July
August
September
Inflows
Bank Loan
5000
Savings
3000
Sales
–
4500
4500
4950
4950
4950
Total Inflows
8000
4500
4500
4950
4950
4950
Outflows
Equipment
4200
Wages
800
Purchases
–
1200
1200
1200
1200
1200
Loan Repayment
–
75
75
75
75
75
Rates
130
130
130
130
130
130
Drawings
1900
1900
1900
1900
2200
2200
Advertisement
500
125
125
125
125
125
Insurance
105
105
105
105
105
105
Rent Premises
350
350
350
350
350
350
Total Out flows
7985
3885
3885
3885
3885
3885
Opening Bank Balance
–
15
630
1245
2310
3375
Net Cash Inflow/(Outflow)
15
615
615
1065
1065
1065
Closing Balance
15
630
1245
2310
3375
4440
Tina’s cash flow position appears to be very strong. The Cash flow forecast drawn above is the best evidence of this statement. How ever, her initial success depends upon the availability of bank loan, which, if not provided, could make her suffer negative cash flows for a lot of months. It seems, as her industry PR is strong and she is reasonably confident that her services would be highly utilized by customers in return for a decent sum of money. The problem that persists is the dependence on bank loan and the equivalency in debtor’s and creditors days. It is not advisable that the cash should be received and paid in the same periods, since it could give rise to liquidity problems. Similarly, complete dependency on bank loan is an area of uncertainty.
Two adjustments that I would suggest are:
1- Demand cash from customers the moment service is provided. Cleaning services are charged very nominally, and customers can easily pay for them out of their pockets. No credit needs to be given.
2- Based upon the strength of cash sales, avoid obtaining loan from the bank, which would give rise to unnecessary finance cost.
The readjusted bank balances are shown below.
April
May
June
July
August
September
Pre-adjusted Balance
15
630
1245
2310
3375
4440
Less: Inflow from bank loan
(5000)
Add: Cash from Sales
4500
4500
4950
4950
4950
4950
Add: Savings from interest
75
75
75
75
75
Less: Cash from credit sales (previously)
(4500)
(4500)
(4950)
(4950)
(4950)
Re Adjusted Balance Opening
(485)
(265)
1505
3890
7340
Readjusted Balance Closing
(485)
(265)
1505
3890
7340
11855
It is easily detectible that the closing balance for September is $7415 greater than it had been previously. Bevan would surely reap higher profits if she follows the above recommendations. Although, two initial months would suffer a negative cash flow, yet they can be survived by obtaining over draft from the bank. However, the after effects of this short sacrifice would bring fruitful results.
The working capital ratio is also known as the Current Ratio. It can be calculated as follows:
Current Assets
Current Liabilities
Hence, to calculate the working capital ratio, the above formula can be employed
1500+3000+300
2500+1500
4800
4000
1.2:1 > Working Capital Ratio
The working capital ratio is just perfect, and does not need any particular adjustment. However, it seems as Lorna Lane is overtrading. She has a bank OD, and her cash is very low. However, her debtors and inventory show very high figures. This is due to excessive credit selling, and purchase of inventory. Lorna should cease to allow large credit allowances, and should be careful about buying as much inventory, as is needed.
