cash flow management
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TRANSCRIPT
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