cash flow management
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BUSS11.13 Using cash flow
forecasting
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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
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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)
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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
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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
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Cash flow forecasting
The process of estimating the expected cash inflows and cash outflows over a period of time
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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
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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
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Task 1
Complete the cash flow forecast for Fun for Kids Ltd on p117 and 118 of your textbook
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Causes of cash flow problems
Seasonal demand
Losses Too many credit sales
Overtrading
Over-investmen
t
The unforesee
n
Too high stock
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Perils of cash flow forecasts
Changes in the economy
New competitors
Changes in consumer
tastes
Poor market research
Uncertainty
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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
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Task 2
Class discussion of Practice Exercise 2: Fun for Kids Ltd, Qs 2 - 4
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Task 3:
Case Study: VKP Limited
pp118 - 119
Qs 1 - 5
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Homework assignmentQuestion 1:What is meant by the term ‘cash outflow’?Use your textbook here to reproduce an accurate definition
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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
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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
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Homework assignmentQuestion 3:Calculate(b) VKP’s closing balance in DecemberClosing balance = Opening balance +/- net inflow
= £100,000 - £51,000
= £49,000
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Homework assignmentQuestion 4:
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Homework assignmentQuestion 4:Reasons include:
No credit termsNo need to hold stockCredit received on stockFew seasonal variationsVAT second largest outflow
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Homework assignmentQuestion 5:
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Homework assignmentQuestion 5:
Suggest at least 2 implications
Apply them to the caseExplain / analyse themMake a judgement on them
and conclude
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Homework assignmentQuestion 5:Aim to balance your answer
DisadvantagesLikely to worsen cash flow
in short termIncreases the risk of bad
debtIncrease admin costs
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Homework assignmentQuestion 5:Aim to balance your answer
AdvantagesMay increase salesMay earn interest on credit
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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