Cash flow targets, intro to budgeting

Cash flow targets, intro to budgeting - Cash flow targets A...

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Cash flow targets A clichéd but nevertheless relevant saying amongst bank managers goes like this: Revenue is king, Profit is Sanity, CASH IS KING. The logic behind the saying is straightforward. Many businesses focus on growing revenues and take great pleasure from being boasting about the total sales they achieve. However, what if those sales are not profitable? A business that runs out of cash becomes insolvent and fails. In contrast, a business that generates strong profits and turns them into positive cash flow is in a very strong position to achieve all of its objectives. A variety of possible cash flow objectives might be set by a business depending on its financial position and corporate strategy. For example: Reduce bank borrowings to a target level – perhaps by repaying amounts owed under bank loans or restricting the use of bank overdraft facilities Minimise the time taken by customers who pay on credit to settle outstanding invoices – this is traditionally a major concern of smaller businesses and an obvious focus for a cash flow objectives Extend the period taken to pay suppliers to maximum permitted period – e.g. paying trade creditors at the end of any agreed credit period Building a buffer balance of cash as a precaution against unforeseen circumstances Minimising the amounts paid out in interest charges Reducing the seasonal swings in cash flow – perhaps by finding new uses for excess production capacity in quiet periods, or developing markets which are counter-seasonal to existing revenues Returns on investment objectives The funds invested in a business need to earn a return. Ideally that return at least matches, and ideally exceeds, the target return set by management. The main performance measure of return in a commercial business is
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This note was uploaded on 03/18/2012 for the course ACCT 205 taught by Professor Christensen during the Spring '11 term at Boise State.

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Cash flow targets, intro to budgeting - Cash flow targets A...

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