cash flow management

BUSS11.13 Using cash flow

forecasting

What is cash flow?

The amounts of money flowing into and out of a business over a period of time

NB CASH FLOW IS NOT THE SAME THING AS PROFIT

What are cash inflows?Receipts of cash

Cash flows into a business from:

- sales of goods and services

- payments by debtors (people who OWE the business money)

- money received from loans from the bank

- interest received from cash in the bank

- sales of assets (things the business owns)

What are cash outflows?

Payments of cashCash flows out of a business from:

- purchase of raw materials and wages etc

- money paid to creditors (people to whom the business owes money)

- money used to repay loans to the bank

- payment of rent

- buying assets

- payment of interest on loans

Visualising cash flow

The difference between the amount of money flowing into a business and the amount flowing out is important

See what happens when there is a positive cash flow

See what happens when there is a negative cash flow

Cash flow forecasting

The process of estimating the expected cash inflows and cash outflows over a period of time

Why forecast cash flow?To identify likely cash flow problems

- to ensure that bills can be paid

To enable the firm to plan expenditure- to ensure expenditure takes place when there is sufficient cash

To allow time to seek additional cash- to seek overdraft facility from a

bank or a loan to cover major expenditure

To avoid going into liquidation- businesses that can’t pay their

bills face liquidation

Constructing a cash flow forecast

Key terms:

Opening balance – amount of cash the business starts with in any month or year

Cash inflow – money coming in

Cash outflow – money going out

Net cash flow – difference between money coming in and money going out

Closing balance – the opening balance + net cash inflow

Task 1

Complete the cash flow forecast for Fun for Kids Ltd on p117 and 118 of your textbook

Causes of cash flow problems

Seasonal demand

Losses Too many credit sales

Overtrading

Over-investmen

t

The unforesee

n

Too high stock

Perils of cash flow forecasts

Changes in the economy

New competitors

Changes in consumer

tastes

Poor market research

Uncertainty

Task 2

Using pp113 – 115 of your textbook create a mind map of the different ways in which cash flow can be improved

Identify the pros and cons of each method

Task 2

Class discussion of Practice Exercise 2: Fun for Kids Ltd, Qs 2 - 4

Task 3:

Case Study: VKP Limited

pp118 - 119

Qs 1 - 5

Homework assignmentQuestion 1:What is meant by the term ‘cash outflow’?Use your textbook here to reproduce an accurate definition

Homework assignmentQuestion 2:Identify two other items that could be included under the heading ‘cash inflows’Refer to the textbook definition of cash inflows and list two cash inflows other than sales revenue

Homework assignmentQuestion 3:Calculate(a) VKP’s predicted ‘purchases’ in AugustCash outflows = £64,000Wages, drawings, admin costs = £8,000

Purchases = £64,000 - £8,000

= £56,000

Homework assignmentQuestion 3:Calculate(b) VKP’s closing balance in DecemberClosing balance = Opening balance +/- net inflow

= £100,000 - £51,000

= £49,000

Homework assignmentQuestion 4:

Homework assignmentQuestion 4:Reasons include:

No credit termsNo need to hold stockCredit received on stockFew seasonal variationsVAT second largest outflow

Homework assignmentQuestion 5:

Homework assignmentQuestion 5:

Suggest at least 2 implications

Apply them to the caseExplain / analyse themMake a judgement on them

and conclude

Homework assignmentQuestion 5:Aim to balance your answer

DisadvantagesLikely to worsen cash flow

in short termIncreases the risk of bad

debtIncrease admin costs

Homework assignmentQuestion 5:Aim to balance your answer

AdvantagesMay increase salesMay earn interest on credit

Homework assignmentQuestion 5:Don’t forget to make judgements

Definite decrease in cash flow vs potential increase in

profitCash flow currently stableClosing balances not very

largeNeed for overdraft