Cash Flow Management
The extent of credit on current bank accounts, including current loan accounts: the frame of credit authorized for the specific client must be maintained. The purpose of the Bank of Israel order is to reduce the uncertainty caused to the customer as well as to the bank by credit overdrawing (overdraft) on current accounts.
Beginning July 1 2006 the banks are obliged to carry on the Supervisor of Banks' decision to maintain the frame of credit authorized for current accounts, including current loan accounts. This decision causes small businesses to make financial reorganizations: to build up cash flow, be able to repay overdrafts, manage the business's commitments and the rate of planned investments.
- Characteristics of Cash Flow
- § Only the physical movement of money
- § The cash flow is always for a future time range (otherwise it is almost meaningless)
- § The profits are usually not the same as the sales (for credit sales, for example).
- § The payments are usually not the same as the expenses (amortization for example).
- § Some of the profits and the payments are known in advance while some are uncertain and can only be estimated (since the cash flow refers to the future).
- Goals and Usages of Cash Flow
- § Forecast of the future bank account condition.
- § Vital information on decision making regarding sales, levy, customers and suppliers' credit etc.
- § An assessment tool on required credit frames
- § Presentation of a balance point for a new business or for a business with an overdraft on their ban account
- § An advance notice for an expected deviation from the frame of credit (and in extreme cases - an advance warning of bankruptcy).
- The main tasks of the cash flow report:
- § A planning tool for cash flow according to the productive and operative presumptions.
- § Determines the quantity of money required for the operating capital to make the business flow on.
- § Determines the credit needs that the business requests from the bank or from an investor.
Many businesses fail due to wrong management of the current cash flow. Hence the importance of the cash flow, which allows a comprehensive analysis of the state/ financial strength of the business in a long run.
- Every business aspires to raise the sales and the profitability. A basic condition for the existence of any business is a positive operating profit (an operating profit is income minus expenses excluding funding). A business with a negative operating profit must become more efficient and/or reduce the expenses to the state when the operating profit rises above zero.
- In order to achieve a financially efficient business management, one must relate to the following subjects:
- § Profitability assessment on a level of groups of products or profit centers.
- § Budget management and budget implementation - planning versus resources.
- § Cash flow management
- Difficulties in the cash flow may stem from the following:
- Expansion of the business activity brings about growth of the customers' credit and the stocks, which creates flow shortage.
- New credit structure which requires response to the business needs.
- An accurate cash flow management requires reference to three types of cash flow as appears in the financial reports:
- Flow from the business current activity - the cash which the business makes out of its activity: collection from customers, payments to suppliers and to employees, fixed charges.
- Flow from investments - the cash required for making investments
- Flow from funding - cash flow from taking and repaying loans from banks and owners, plus funding expenses.
Please find attached a cash flow that will assist you to manage your cash flow.
We strongly recommend you to participate in the cash flow workshop that takes place in Mati Ashdod.
