What are some of the things you can do if your cash flow for

What are some of the things you can do if your cash flow forecasting projects a cash shortfall? Explain the importance of forecasting cash flow receipts in general.

Solution

Cash flow analysis is important for the business since it allows the business to assess the amount of cash that it would generate. Forecasting cash flow receipts is useful since it allows the business to estimate the amount of expenses and liabilities it can meet through the cash that it generates. It allows the business to plan its operations and investment activities. Assessing the amount of extra cash available with the business will allow the management to plan its capital budgeting expenditures. The management can also plane its financing activities such as an equity issue or dividend payout.

In case there is short fall in the forecast of cash flow the company can try and reduce its average collection period. It can also negotiate terms with the suppliers to increase the average days payable. If the shortage is too high for if the shortfall cannot be made by reducing the collection period for increasing the days payable the company can plan to take a short term or a long term loan. It can defer its capital expenses or raise more fundsthrough equity.