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Excerpts from the textbook on management I have receintly published, "Management: a Holistic Value Chain Approach". 8.5.

Cash flow management and budgeting Cash flow management is one of the most important responsibilities of financial management and may be considered as equally important to financial management which has profitability a major target. Liquidity in cash is most important because it is the means which allows a firm to stay in course in matters of planning and attain its targets. In the extreme case, even a firm which is profitable may run into serious difficulties and even go out of business if it is not capable of maintaining liquidity levels which will allow it to be regularly in a position to meet its cash obligations. A budget is a list of all planned expenses and revenues. It is a plan for saving and spending. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: 1. Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out. 2. Enable the actual financial operation of the business to be measured against the forecast. 3. The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year. While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT, etc.) to list their expected revenues and expenses in the final budget. 4. In practice management monitors the flow of the budget on a continuous basis to insure that operations stay on course. It is therefore essential to run budget figures on monthly, weekly and daily periods to avoid running out of cash and becoming insolvent. If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result. Partial budgets such as event management budgets are also worked out to insure that individual events also stay on course. These budgets are also incorporated into the general budget. A budget is a fundamental tool for an event director to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even. A budget can also be used as a pricing tool. Budgeting and business planning; New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cash flow, allowing you to invest in new

opportunities at the appropriate time. If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure. A budget is a plan to: a. Conrol your finances, b. Ensure you can continue to fund your current commitments, c. Enable you to make confident financial decisions and meet your objectives, and d. Ensure you have enough money for your future projects, It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome that your business wants to achieve. Benefits of a business budget; there are a number of benefits of drawing up a business budget, including being better able to: a. Manage your money effectively, b. Allocate appropriate resources to projects, c. Monitor performance, d. Meet your objectives, e. Improve decision-making, f. Identify problems before they occur - such as the need to raise finance or cash flow difficulties, g. Plan for the future, and h. Increase staff motivation. 8.5.2. Cash flow and the cost of capital - McKinsey Global Institute, February 2011 Flexibility in budgeting cash flow management becomes much tighter when the cost of capital rises. The rise in interest rates over the late part of 2010 and early 2011 do not bode very well for cash flows. Interest rates are rising in the long term. Businesses will have to adapt, while governments must prevent an era of creeping financial protectionism. In the earlier days of this century the global economy was facing a dilemma. Attempts to boost growth had lowered interest rates in advanced economies. In our times, however, this trend is reversing. Across Africa, Asia, and Latin America, rapid urbanization is increasing the demand for roads, water, power, housing, and factories. Global investment demand will now rise considerably up to 2030, reaching levels not seen since the post war reconstruction of Europe and Japan. An era of sustained tighter capital will have significant implications. Governments should anticipate higher costs of debt and act now to improve their public finances. The fiscal deficits possible with recent low interest rates will not be as easily financed in the future and could result in greater crowding out of private investment.

New ways of financing infrastructure in emerging markets will also be important, given their low domestic savings. Emerging economies must work to develop deeper and more stable financial markets to increase local savings, while mature economies should introduce policies to spur household saving (or at least reduce borrowing). Businesses will also need to adapt to a world in which capital costs more. Just as Japanese companies with access to cheap capital in the 1980s held an advantage over Western peers, companies with access to inexpensive capitalfor example, those based in high-saving countries such as China or with links to sovereign-wealth funds will have a new source of competitive advantage. Financing is likely to become bundled with exports as a source of distinctiveness, while financial institutions need to refocus their businesses on accessing new global sources of savings. For three decades, the world has grown used to cheaper capital. But the next stage of globalization will be different. Governments will soon want to stockpile capital, and efforts to boost todays global recovery must also anticipate an era in which capital scarcity places new brakes on growth. A future of creeping financial protectionism would be just as destructive as todays currency wars. We must begin to take precautions.

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