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Cash Flow
Completion requirements
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Remember that the cashflow projection/budget reflects only transactions that result in actual cash inflows or outflows.
- Depreciation is not a cashflow transaction and should not be included.
- Credit sales (debtors) are not a cashflow transaction and should not be included. The eventual cash collection from debtors, however, must be included as and when they occur.
- Credit purchases (creditors) are not a cashflow transaction and should not be included. The eventual cash payment of creditors, however, must be included as and when they occur.
- The cashflow projection is not an Income Statement; purchases of fixed assets must be included. If bought for cash, the full cash payment must be included when payment is expected to take place. If purchased on credit, the instalments must be included as and when they will take place.
- Provisions are not cashflow transactions. Provision for taxes or dividends must not be included. Only actual dividends or tax paid must be included in the expected period of payment.
Note that the collection of cash from debtors does not necessary take place in the month after the sale has been made, but could be several months later, if at all (bad debts). This lagging of collections needs to be considered when preparing a cash budget. A similar lagging can also be found in the payment of creditors.
Example:
Cash Strapped Ltd.’s expected sales, all on credit for June, July and August, are R210 000, R250 000 and R240 000 respectively. Actual sales for March, April and May were R140 000, R180 000 and R190 000 respectively.
Experience has shown that 75% of a month's sales are collected in the following month, 15% a month later, while the rest are seldom collected (bad debts).
Actual/expected sales:
March April May Jun Jul Aug
140 000 180 000 190 000 210 000 250 000 240 000
Cash sales- none:
Income from debtors 75% 142 500 157 500 187 500
Income from debtors 15% 27 000 28 500 31 500
Click here to download an Example of a Cash Flow Statement.
Click here to download a Cash Flow Statement Template.