- Finance
- October 18, 2010
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Cash Flow Management
by Dipak AsharCash flow Management is very crucial for the smooth running of any Business , be it a Trading and Distribution company having short term issues or Manufacturing organisations having to take small/medium/long term decisions or a Corporate executing Turnkey/Infrastructure Projects and has to invest in Capital intensive Machinery and block funds in Receivables and Inventories.
Components of Cash flow model should cover
- Day – to – day expenses
- Committed periodical/non periodical expenses for services procured
- Payment for the purchases of Material /Capital Assets /Major repairs
- Repayment of Bank loans , Term Borrowings ,Buyers Credits
- Expected collection of dues from customers/clients
- Advances for new contracts
- Collection of old Dues/contractual claims
- Misc surprises
The success of the cash flow forecast depends on:
- Creating supporting workings wherever those are available from the main systems like collection plan, payables to vendors , repayment of loans /buyers credits and so on
- Monitoring the Component wise actual Cash Flow with the projections
- Breaking it down to the smallest level of component and also Time Period
- Identifying certain annual /quarterly /periodical payments like Insurance Premiums/Bank Guarantees / Festival bonuses and projecting them for the relevant period
- Review the surprises and to continue adding the items of surprise as a regular component of Cash Flow forecast
Apart from identifying surplus/shortages in advance, the Cash Flow forecast helps in placing the surpluses or raising term borrowings for specific period, thereby minimising sudden cash shortages as well as minimises need to utilise cash credits/overdrafts which are costly. This also helps in minimising surplus funds in the account which does not earn any interest.
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