cash-flow aim: explain how a cash flow works objectives: 1.identify what makes-up a cash-flow 2.be...
TRANSCRIPT
Cash-flow
Aim: Explain how a cash flow works
Objectives:1. Identify what makes-up a cash-flow2. Be able to work out relevant cash flow
calculations3. Analyse and interpret cash flow
Word Clue
1. Cash Deficit2. Cash Inflow3. Cash outflow4. Cash Surplus5. Creditor6. Debtor7. Net Cash Flow
Sales
Debtors
Loan
Van maintenance
Interest payments
Raw materials
Cash flowCash flow is the flow of all the money into and out of
the business. When a firm sells its products, money
flows in. When it buys materials or pays wages, money
flows out.
Cash Flow ForecastA cash flow forecast is a good way of predicting when the firm might
face a liquidity problem.
Example 1
Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08
Opening balance £5,000 £7,000 £4,000 £6,000 £15,000
Inflows £20,000 £18,000 £20,000 £23,000 £18,000
Total £29,000 £22,000 £26,000 £33,000
Outflows £18,000 £25,000 £16,000 £33,000
Closing balance £7,000 £4,000 £12,000 £15,000
£25,000
£25,000
£22,000
£22,000
£6,000
£6,000
£14,000
£14,000
£35,000
£35,000
£16,000
£16,000
£20,000
£20,000
£0
£0
Example 2
Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08Opening bank balance £500 £1,290 £1,025 £305 £115 -£60
Sales £150 £155 £200 £300 £315 £325
Loan £1,000 £0 £200 £0 £0
Total receipts £155 £400 £300 £315 £325
Is total receipts in Jan:
£1,000
£150 £1,150
£1,650
£1,150
TRY AGAINTRY AGAINTRY AGAIN
What was the loan amount in May:
£0
£305
£0 £300
£200
TRY AGAINTRY AGAINTRY AGAIN
Example 2 Jan 08 Feb 08 Mar 08 Apr 08 May 08Jun 08
Raw materials £150 £200 £310 £250 £230 £110
Van costs £170 £170 £750 £190 £190
Interest £40 £50 £60 £60 £70 £70
Total payments £420 £1,120 £490 £490 £370
The total payments in Jan were: £210
£360 £150
£320
£360
TRY AGAINTRY AGAINTRY AGAIN
The van costs in Apr were:
£490
£180£310
£0
£180
TRY AGAINTRY AGAINTRY AGAIN
Example 2Opening bank balance £500 £1,290 £305 £115 -£60
Sales £150 £155 £200 £300 £315 £325
Loan £1,000 £0 £200 £0 £0 £0
Total receipts £1,150 £155 £400 £300 £315 £325
Raw materials £150 £200 £310 £250 £230 £110
Van costs £170 £170 £750 £180 £190 £190
Interest £40 £50 £60 £60 £70 £70
Total payments £360 £420 £1,120 £490 £490 £370
Net cash flow
closing bank balance £1,290 £305 £115 -£60 -£105
£790 -£265 -£720 -£190 -£175 -£45
£1,025
£1,025
Now your turnYou are required to complete a cash flow forecast. There are 4 ability levels.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecOpening bank balance £500
£1,290
£1,125
£1,055 £865 £690 £645 £575 £790 £820 £860 £880
Sales £100 £155 £200 £300 £315 £325 £350 £430 £450 £500 £490 £580
Debtors £50 £100 £0 £0 £0 £0 £0 £210 £40 £0 £0 £0
Loan£1,00
0 £0 £200 £0 £0 £0 £0 £0 £0 £0 £0 £0
Total receipts£1,15
0 £255 £400 £300 £315 £325 £350 £640 £490 £500 £490 £580
Raw materials £150 £200 £310 £250 £230 £110 £150 £160 £190 £200 £210 £210
Van costs £170 £170 £100 £180 £190 £190 £200 £195 £200 £190 £190 £195
Loan Interest £40 £50 £60 £60 £70 £70 £70 £70 £70 £70 £70 £70
Total payments £360 £420 £470 £490 £490 £370 £420 £425 £460 £460 £470 £475
Net cash flow £790 -£165 -£70 -£190 -£175 -£45 -£70 £215 £30 £40 £20 £105closing bank balance
£1,290
£1,125
£1,055 £865 £690 £645 £575 £790 £820 £860 £880 £985
Can a profitable business run out of cash?
Sales฿40,000 (50% cash & 50% credit)
Cost of sales฿15,000
Gross Profit฿25,000
Opening Balance......Cash inflow................Cash outflow.............Closing balance.......
฿20,000฿0
฿15,000฿5,000
InsolvencyThere is a clear difference between profit & cash flow.
Although the goods have been sold, the business has only received payment for 50% of them. Customers buying goods on credit will pay cash for them later months.
Therefore, YES a profitable business can run out of money. This situation is called insolvency.
Insolvency occurs when:•Allowing customers too long a credit period•By buying too many fixed assets, and thus having very little working capital
Key terms...
Working capital The amount of money a business has to meet its day-to-day needs.
LiquidityIs the ability for a business to pay its short term debts.
InsolvencyDescribes a situation when a business is unable to pay its debts.
Homework
Complete Activity 8.5 (Case Study) page 132.
What have we learnt?
Discuss with a partner before you
share it with the class
Example 3Cash-flow forecast
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Opening bank balance £105 £95 £45 -£190 -£500 -£895
Sales £350 £350 £325 £300 £275 £250
Loan £0 £0 £0 £0 £0 £1,000
Total receipts £350 £350 £325 £300 £275 £1,250
Each Column starts with an opening balance. The first column shows how much money is expected to be in the bank at the beginning of July 2008. In this example it is £105
The next row shows how much money the business expects to receive during July, in this example it is £350
Example 3 Cash-flow forecast
Total payments is made up of the costs the business is expecting to pay out. In July 2008, the business expects to pay out £360
The business expects costs to rise in the next 6 months! Van costs have risen considerably, why?
Jul-08Aug-
08Sep-
08 Oct-08Nov-
08Dec-
08
Raw materials £150 £200 £310 £350 £400 £500
Van costs £170 £200 £250 £260 £270 £280
Interest £40 £0 £50 £100 £150 £140
Total payments £360 £400 £610 £710 £820 £920
Example 3 Cash-flow forecast
Closing balance are the most important figures, if the figure goes to low, the business has a cash flow (liquidity) problem.
Jul-08Aug-08 Sep-08 Oct-08 Nov-08 Dec-08Opening bank balance £105 £95 £45 -£240 -£650 -£1,195
Sales £350 £350 £325 £300 £275 £250
Loan £0 £0 £0 £0 £0 £1,000
Total receipts £350 £350 £325 £300 £275 £1,250
Raw materials £150 £200 £310 £350 £400 £500
Van costs £170 £200 £250 £260 £270 £280
Interest £40 £0 £50 £100 £150 £140
Total payments £360 £400 £610 £710 £820 £920
Net cash flow -£10 -£50 -£285 -£410 -£545 £330closing bank balance £95 £45 -£240 -£650 -£1,195 -£865
What have we learnt?• What a cash flow is.• How to work out total receipts & total
expenditure.• Why cash flow forecast is important.• How to input a cash flow on to a
spreadsheet.• And.....................................................
...