The nature of Cash FlowsAs Business Studies

Mr Ahern

Lesson Objectives

• Identify the meaning of cash-flow forecast• Identify what cash inflows and cash outflows

are• Understand the elements of cash flow

forecasting • Asses the use of cash-flow forecast

What is cash in business terms?

• Key Term: Cash in a business is the notes and coins they have and also the money a business has in the bank.

• Key Term: Cash flow is the movement of cash in and out of the business.

Cash-flow diagram

The Tap

The Drain

You should have included the following – inflow – The Tap

• From Sales– Cash from sales– Cash from credit sales (comes in after a time lag)

• From investors– Cash from investors putting capital into the

business to buy a share in the business.• From lenders

– Cash from a bank loan• From disposal of assets

– E.g cash from disposal of assets e.g. selling cars.

You should have included the following – outflow – The Drain

• Purchasing stock• Paying creditors – these are people you owe money to e.g.

banks or other businesses• Paying wages• Paying rent• Paying dividends to share holders• Paying insurance• Paying for advertising• Paying tax• Paying interest on debts• Purchasing items on credit (when you pay for them at a later

date)

Task

• All of the money that would come into the business is known as Receipts - The Tap

• All of the money that would go out of the business is known as Payments - The Drain

• Set out your work in the table on the next slide.

How to set out your work

Nov 2010 (£)

Inflow/ Receipts

Outflow/ Payments

What is Net cash flow

• Key Term: Net cash flow is the amount of cash left over once the outflow/ payments have been subtracted from the inflow/ receipts.

• Net cash flow = Inflow (Tap) – Outflow (Drain)• Or• Net cash flow = Receipts - Payments

Business income

• If a business income in a given month is greater than its expenditure (Cost), then a positive cash-flow will be shown.

• Tap greater than drain = positive• If expenditure is greater than income a

negative cash-flow will be shown• Drain greater than tap = negative

The importance of cash• If a business does not have cash then the following problems

could occur. Business has a lack of cash

Business is unable to pay bills/staff

Suppliers stop delivering as they have not been paid.

Business may be taken to court because they can’t pay creditors

(people they owe money to)

Business becomes insolvent (can no longer pay its debts)

What is a cash flow forecast?

• A business needs to plan to ensure it has enough cash to survive. To plan for this a business will create a cash flow forecast.

• Key Term: A cash flow forecast is a prediction of how cash will flow in and out of a business over a period of time.

Why would a business use a cash flow forecast

• A business will use a cash flow forecast to– See if the business expects to have a suitable

amount of cash to survive– See if the business needs to take any actions to

avoid a shortage of cash in the business at any given time

– See how well the business should be performing after a period of time.

– Show to the bank to discuss if a loan is needed and how a loan would be repaid.

Example Cash Flow Forecast

(£) Jan Feb Mar Apr May JuneTotal Receipts

Total Payments

Net Cash Flow

Opening Bank Balance

Closing bank balance

Example Cash Flow Forecast

• Key Term: Opening balance is the amount of cash in the business at the start of each month (Water in the sink)

(£) Jan Feb Mar Apr May JuneTotal Receipts

Total Payments

Net Cash Flow

Opening Bank Balance

Closing bank balance

Example Cash Flow Forecast

• Key Term: Closing Balance becomes the opening balance at the start of the next month (Water left over in the bath)

(£) Jan Feb Mar Apr May JuneTotal Receipts

Total Payments

Net Cash Flow

Opening Bank Balance

Closing bank balance

Example Cash Flow Forecast

• Key Term: Closing balance is the amount of cash in the business at the end of each month. (water left in the sink)

• The closing balance is calculated by adding the net cash flow onto the opening balance

• Closing balance = opening balance + net cash flow

NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

(£) Jan Feb Mar Apr May JuneTotal Receipts

Total Payments

Net Cash flow

Opening Bank Balance

Closing bank balance

Task

• Complete the following cash-flow forecast for Monsieur LePlonk

(£) Jan Feb Mar Apr May JuneReceipts 1,500 1,200 900 2,000 2,100 2,400

Payments 1,400 1,200 800 1,700 1,750 1,800

Net Cash flow

Opening Balance

0

Closing Balance

NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Task

• Complete the following cash-flow forecast for Monsieur LePlonk

(£) Jan Feb Mar Apr May JuneReceipts 1,500 1,200 900 2,000 2,100 2,400

Payments 1,400 1,200 800 1,700 1,750 1,800

Net Cash flow 100 0 100 300 350 600

Opening Balance

0 100 100 200 500 850

Closing Balance

100 100 200 500 850 1450

NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Task

• Complete the cash flow forecast for Shelly Isfit

(£) Jan Feb Mar Apr May JuneReceipts 800 1000 700 700 500 400

Payments 600 700 800 800 700 700

Net Cash flow

Opening Balance

0

Closing Balance

NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Task

• Complete the cash flow forecast for Shelly Isfit

(£) Jan Feb Mar Apr May JuneReceipts 800 1000 700 700 500 400

Payments 600 700 800 800 700 700

Net Cash flow 200 300 -100 -100 -200 -300

Opening Balance

0 200 500 400 300 100

Closing Balance

200 500 400 300 100 -200

NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

Reasons for cash flow improvement

• Increased sales• More efficient credit sales (they are paying

earlier)• Reduced fixed costs• Reduced variable costs • Investments maturing

Questions

• Look at the cash flow forecasts for Monseir LePlonk and Shelly Isfit.

• What would be the consequences to Shelly’s business if her cash flow forecast is correct?

• What actions could she take to avoid any cash problems?

• What could be a reason for Monsieur LePlonk’s cash flow improving over the months?

Homework!!

• Make sure you write up notes from todays lesson on Cash-flow by next lesson on Thursday

• Have a nice day