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How do changes in credit terms affect cash flow forecasts?

Changes in credit terms can significantly impact cash flow forecasts by altering the timing and amount of cash inflows and outflows.

When a business changes its credit terms, it essentially alters the conditions under which it sells its goods or services on credit. This can have a direct impact on the cash flow forecast, which is a projection of the company's future financial position based on expected cash inflows and outflows.

For instance, if a company decides to extend its credit terms from 30 days to 60 days, it means that customers now have a longer period to pay for their purchases. While this might attract more customers and potentially increase sales, it could also lead to a delay in cash inflows. This is because the company will have to wait for a longer period to receive payments from its customers, which could potentially lead to cash flow problems, especially if the company has immediate cash needs.

On the other hand, if a company decides to shorten its credit terms from 60 days to 30 days, it could speed up cash inflows as customers will be required to make payments faster. However, this could also deter some customers and lead to a decrease in sales, which would also affect the cash flow forecast.

Similarly, changes in credit terms can also affect cash outflows. If a company is able to negotiate longer credit terms with its suppliers, it can delay its cash outflows, thereby improving its short-term cash flow position. Conversely, shorter credit terms with suppliers would mean faster cash outflows.

Therefore, any changes in credit terms need to be carefully considered and factored into the cash flow forecast. It's important to remember that while extending credit terms might boost sales, it could also lead to potential cash flow problems. Similarly, while shorter credit terms might improve cash flow, they could also lead to a decrease in sales.

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