Cash Flow Projections and Statements
-Dr. Lalit Kumar Setia
Most
of the students face problems in learning how to prepare Cash Flow Statements
from the Financial Statements. At the time, I delivered sessions in my courses at Haryana Institute of Public Administration to the students of Entrepreneurship Course and IVRI - Incubator, ICAR - Indian Veterinary Research Institute; I explained - How to measure Cash, What is Cash Flow and How to identify inflows and outflows, Why an entrepreneur should be aware of these projections before taking the decisions in the enterprise and How to manage income and expenditure.
Everything
is required to be monitored in the business and control over expenditure is
possible only if an entrepreneur has enough knowledge and skill to perform
these functions. A few challenges in front of an entrepreneur:
a.
How to handle cash flow problems
b.
How to manage Working Capital
c.
How to manage Debtors
d.
How to control Credit and use Debt Financing
e.
How to manage Creditors
f.
How to manage Stock and use Inventory efficiently
g.
How to prepare a checklist for managing Cash Flows
The
answers to the above questions and skills lie in Cash Flow Projections and Cash
Flow Statements. Whenever any investor evaluates a business, it is not just an analysis of financial statements which are giving a current financial position
and the current ability for performing operations to earn profits; rather it is
more important to predict future financial position and future likely
performance for earning profits.
Financial Statements
The
financial statements i.e. Income Statement, Balance Sheet are the statements that
point out the existing financial performance and existing financial position.
For future financial performance and future financial position, it is a must estimate the revenues, estimate the expenditure, estimate the financial
position.
Using the template to project the Cash Flows
On
the basis of the template, the students try to start cash flow projection and after
projecting the cash flows and filling estimated figures, the template is kept
and filled with the actual figures as time passes. Firstly, 90 days’
projection is done and the activities are performed as per projection. As the
figures are estimated, it is possible to have the comparison with the actuals after making expenditures and then revise the estimates as per the actual happenings. After
comparison, what an entrepreneur finds:
a.
Monitor from where the money comes
b.
Monitor to where the money goes
c.
More accurate decisions with regard to working capital management
d.
Reply to the queries of the investor so that they trust upon the projections of
business
e.
Prevent the likely cash crunch and threats on part of working capital with
planning
What may happen when Cash Flow Statements are not prepared on basis of projections?
Working capital mismanagement leads to a lot of problems. For example, there may be unnecessary delays in the payments of the vendors and suppliers, it is also possible that the installments of debt repayment may be missed. In case, the business suffered frequently on part of making its payments in a timely manner, it is possible that customers be dissatisfied and the business reach the point of insolvency. Therefore, it is a must to prepare the projections accurately and stick to the figures to the extent possible.
