unit 2.1 17 improving cash flow

Who wants to be a MILLIONAIRE?

Question 1

What percentage of businesses fail due to cash flow problems?

A 70%B 50%C 95%D 30%

Question 2

Cash into the business is also known as…

A Cash outflow

B Payments

C Money out

D Receipts

Question 3

Cash flow cannot be calculated without which piece of financial information…

A Net totalB Opening balanceC Payments totalD Closing balance

Question 4

The closing balance is calculated by…

A Opening balance plus net total

B Opening balance minus net total

C Closing balance plus net total

D Closing balance plus net total

Question 5

Which of the following does your cash flow forecast NOT show?

A Payments

B Receipts

C Closing bank balance

D Your Budget

Which of the following does your cash flow forecast / statement NOT show?

A Expenditure

B Receipts

C Closing bank balance

D Your Budget

Question 6

Cash flow is the movement of money…

A Into and out of the business

B From customers

C Around the business

D From your bank to pay bills

Question 7

Net total is calculated by…

A Payments minus receipts

B Payments plus receipts

C Receipts minus payments

D Receipts plus payments

Who’s a Millionaire?

Improving Cash Flow 17Miss Camacho

Objectives Identify what cash flow problems means

for a business

Analyse the different caused of cash flow problems

Evaluate ways in which a firms cash flow might be improved and problems overcome.

26

The definition, identification, and measurement of cash flows relevant to project evaluation.

27Why Cash Flows? Cash flows, and not accounting estimates, are

used in project analysis because:-

1. They measure actual economic wealth.

2. They occur at identifiable time points.

3. They have identifiable directional flow.

4. They are free of accounting definitional problems.

28The Meaning of RELEVANT Cash Flows. A relevant cash flow is one which will change as

a direct result of the decision about a project.

A relevant cash flow is one which will occur in the future. A cash flow incurred in the past is irrelevant. It is sunk.A relevant cash flow is the difference in the firm’s cash flows with the project, and without the project.

29

Cash Flows: A Rose By Any Other Name Is Just as Sweet.

Relevant cash flows are also known as:-

Marginal cash flows.

Incremental cash flows.

Changing cash flows.

Project cash flows.

30

Project Cash Flows: Yes and No. YES:- these are relevant cash flows -

Incremental future sales revenue. Incremental future production costs. Incremental initial outlay.

Incremental future salvage value.

Incremental working capital outlay.

Incremental future taxes.

31

Project Cash Flows: Yes and No.

NO:- these are not relevant cash flows -

Changed future depreciation.

Reallocated overhead costs.

Adjusted future accounting profit.

The cost of unused idle capacity.

Outlays incurred in the past.

32Cash Flows and Depreciation: Always A Problem.

Depreciation is NOT a cash flow.

Depreciation is simply the accounting amortization of an initial capital cost.Depreciation amounts are only accounting journal entries.

Depreciation is measured in

project analysis only because it reduces taxes.

33

Other Cash Flow Issues. Tax payable: if the project changes tax liabilities,

those changed taxes are a flow of the project.

Investment allowance: if a taxing authority offers this ‘extra depreciation’ concession, then its tax savings are included.

Financing flows: interest paid on debt, and dividends paid on equity, are NOT cash flows of the project.

34

Other Cash Flow Issues. In property investment, ‘property’ cash flows may

be distinguished from ‘equity’ cash flows.

In project analysis, cash inflows are timed as at the end of a year, and capital outlays are timed as at the start of a year.

Forecast inflated cash flows must be discounted at the nominal discount rate, not the real discount rate.

35

Using Cash Flows All relevant project cash flows are set out in a table.

The cash flow table usually reads across in End Of Years, starting at EOY 0 (now) and ending at the project’s last year.The cash flow table usually reads down in cash flow elements, resulting in a Net Annual Cash Flow. This flow will have a positive or negative sign.

36

Project Cash Flows: Summary

Only future, incremental, cash flows are Relevant.

Relevant Cash Flows are entered into a yearly cash flow table.

Net Annual Cash Flows are discounted to give the project’s Net Present Value.

Flick Morgan is starting a mail order company

to sell specialist CD’s. She will work from a

rented office which is costing £2000 a month.

To help her run the business she will employ

two part-time staff. Both members of staff

are on a annual salary of £18,000. To get

started she will require a computer, which she

has estimated to cost £350 and other

essential mailing equipment at £500. A friend

has given her second hand office furniture,

valued at £250. Flick is investing £15,000 of

her own money into the business and has also

been given a Government grant of £5,000.

Flick has forecast that she will sell £20,000

worth of CD’s each month and it will cost her

£12,000 to purchase the stock. Flick must

also pay for essential office running costs; she

expects water bills to be £450 per annum,

heating costs to be £850 and electricity costs

to be £900. she has been advised to take out

insurance and has received a quote for £3000

for the year.

Flick Morgan is starting a mail order company

to sell specialist CD’s. She will work from a

rented office which is costing £2000 a month.

To help her run the business she will employ

two part-time staff. Both members of staff

are on a annual salary of £18,000. To get

started she will require a computer, which she

has estimated to cost £350 and other

essential mailing equipment at £500. A friend

has given her second hand office furniture,

valued at £250. Flick is investing £15,000 of

her own money into the business and has also

been given a Government grant of £5,000.

Flick has forecast that she will sell £20,000

worth of CD’s each month and it will cost her

£12,000 to purchase the stock. Flick must

also pay for essential office running costs; she

expects water bills to be £450 per annum,

heating costs to be £850 and electricity costs

to be £900. she has been advised to take out

insurance and has received a quote for £3000

for the year.

unit 2.1 17 improving cash flow

Design