Cash flowCash flow

THE TIMES 100

THE TIMES 100

What is cash?What is cash?

Cash is notes, coins and bank deposits that provide firms with the spending power to pay their bills and expenses

THE TIMES 100

Cash flowCash flow

Cash flow refers to the flows of cash both into and out of a business

Cash inflows are payments into a firm from customers or other sources

Cash outflows refer to payments made by a business

Net cash flow=cash inflow–cash outflow

THE TIMES 100

Cash flow forecastingCash flow forecasting

Cash inflows result from:Cash sales from customersPayments from debtorsCash from other sources such as bank

loansCash outflows result from:Paying overheads such as rent & wagesPaying for raw materials & other variable

costs

THE TIMES 100

Cash flow forecastingCash flow forecasting

A cash flow forecast will include:Cash inflows (receipts)Cash outflows (payments)Net cash flow (inflows minus outflows)Opening balance (this is the same as

the closing balance of the previous period)Closing balance (opening balance

combined with net cash flow)

THE TIMES 100

Cash flow forecastingCash flow forecasting

Jan Feb March April May June

Cash inflows

$17,000 $18,500 $19,000 $19,800 $21,000 $18,900

Cash outflows

$14,300 $15,100 $24,900 $16,300 $17,800 $24,800

Net cash flow

$2,700 $3,400 ($5,900) $3,500 $3,200 ($5,900)

Opening balance

$2,200 $4,900 $8,300 $2,400 $5,900 $9,100

Closing balance

$4,900 $8,300 $2,400 $5,900 $9,100 $3,200

THE TIMES 100

Importance of cash flow forecastingImportance of cash flow forecasting

To identify periods of cash shortfall so action can be taken to deal with this

To identify periods of cash surplus so expenditure can be planned

To secure additional funding, for example, from a bank

THE TIMES 100

Consequences of cash flow problemsConsequences of cash flow problems

If a firm does not have the cash to pay its debts:

Relationships with suppliers may deteriorate

Workers may leaveIt may have to cease trading

In the short-term CASH is considered to be more important than PROFIT

THE TIMES 100

Causes of cash flow problemsCauses of cash flow problems

Poor planningExternal factors e.g. the credit crunchInadequate credit controlHolding excessive stockInvesting too heavily in fixed assetsOvertrading – expanding quicker than

available funds allow

THE TIMES 100

Improving cash flowImproving cash flow

In simple terms, cash flow can be improved by:

Increasing, or speeding up, cash inflows

Decreasing, or slowing down, cash outflows

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Methods of improving cash flowMethods of improving cash flow

Increase & speed up cash inflows

Decrease & slow down cash outflows

Overdraft or bank loan Delay paying creditors

Debt factoring Delay unnecessary capital spending

Sale of assets or ‘sale & leaseback’

Lease rather than buy

Shorten credit terms for customers & chase up debts

Reduce spending on expenses e.g. negotiate lower rent

THE TIMES 100

Cash v profitCash v profit

Do not confuse cash and profit

The receipt of cash may not coincide with an associated sale, for example:

An item may be bought on credit and paid for at a later date

A bank loan may be taken out causing a positive cash flow, but no sales have been made

THE TIMES 100

Cash flow in contextCash flow in context

THE TIMES 100

Fill the gapsFill the gaps

January February March

Cash inflow £10,000 £11,000 ?

Cash outflow £9,000 £11,500 £10,800

Net cash flow £1,000 ? £400

Opening balance ? £1,600 £1,100

Closing balance £1,600 £1,100 £1,500

What are the missing figures?

Use the CIMA case study to help you

THE TIMES 100

Controlling cashControlling cash

Management accountants deal with a range of issues related to controlling cash in organisations. Give examples of these activities.

Use the CIMA case study to help you

THE TIMES 100

Managing cash shortfallsManaging cash shortfalls

Trained management accountants will forecast when there may be possible cash shortfalls and have strategies in place to deal with these. What might a business do if a possible shortfall has been forecast, to ensure it can pay its creditors?

Use the case study to help you.

THE TIMES 100

Effective forecastingEffective forecasting

Organisations operate within dynamic business environments so management accountants must take a range of external factors into account when forecasting cash flow. Give examples of changes that may affect cash flow forecasts.

Use the CIMA case study to help.

THE TIMES 100

Useful resourcesUseful resources

Cash flow lesson suggestions and activities (The Times 100)

CIMA case study (The Times 100)CIMA website