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Showing posts with label Financial Statements. Show all posts
Showing posts with label Financial Statements. Show all posts

Cash Flow Projections and Statements

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.

Cash Flow Projections and Statements

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.

*Copyright © 2021 Dr. Lalit Kumar. All rights reserved.

This content is written by Dr. Lalit Kumar Setia; a renowned author and trainer. He completed his Doctorate in Commerce from Kurukshetra University Kurukshetra and MBA in Information Technology from GJU, Hisar. He also wrote two books, 15 research papers, and organized more than 200 Training Courses during his working period since 2006 in Haryana Institute of Public Administration, Gurugram. The article was published on 28th November 2021 and last updated on 28th November 2021. The writer can be contacted on lalitkumarsetia@gmail.com 

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