CASH MANAGEMENT

Cash Receipts and Payments

CASH FLOWS

• Life blood of a business• Monitors surpluses• Plan for shortfalls• Plan for financing arrangements• Allows planning of major purchases

TYPES OF CASH FLOWS

• Regular cash flows– The majority– Take place every day, week, month, quarter or

annually e.g. wages, suppliers, customers, taxation payments

• Irregular– As the name implies don't happen on a regular

basis e.g. Purchase of a non current (fixed) asset.

TYPES OF CASH FLOWS

• Exceptional cash flows– When something is not predicted

• For example Machinery breakdown

• Variable and fixed– Variable – amounts may change although

timescale may not e.g. Customer sales and receipts or supplier payments (30 days, etc.)

– Fixed will not e.g. Rent, unless there is a rent review

TYPES OF CASH FLOWS

• Capital and revenue payments– Capital - payments for fixed assets– Revenue - day to day transactions– E.g. Purchase of a company van is capital but the

servicing will be revenue• Capital and revenue receipts

– Capital – cash injections into the business or share capital

– Revenue – day to day receipts from trading.

TYPES OF CASH FLOWS

• Activity 2 – page 49• Payments that relate to the purchase of non-

current assets would beA Capital paymentsB Regular revenue receiptsC DrawingsD Exceptional receipts

TYPES OF CASH FLOWS

• Activity 3 – page 49• Income received from an insurance claim for

lost inventory would be classified as:A Capital paymentsB Regular revenue receiptsC DrawingsD Exceptional receipts

CASH BUDGETS

• Example of cash budget proforma

October £ November £ December £Cash receipts

Total receiptsCash payments

Total paymentsNet cash flow for the monthOpening balanceClosing balance

CASH BUDGETS

• Example pro-forma page 50• Example page 50 - 51

SALES RECEIPTS

• Cash sales– In flow takes place at same time as sale

• Credit sales– In flow takes place at some point in time after the

sale – a LAGGED receipt (30/60 days)– Some customers do not adhere to terms!– Cash received in a month may contain proportions

of sales from previous months.

ExamplePredicted Sales for the quarter

October £680,000

November £700,000

December £750,000

Of these, 20% are cash sales and the remainder on credit. Experience shows that the customers pay according to the following profile:

Payment profile

The month after the sale 20%

Two months after the sale 50%

Three months after the sale 30%

ExampleSales from the previous quarter

July £600,000

August £560,000

September £620,000

Again, 20% are cash sales and the remainder on credit. We can start to prepare the cash budget!

Cash budget – October to November

Cash receipts: October £ November £ December £

Cash sales

(20% of month sales)

136,000 140,000 150,000

ExampleCash budget – October to November

Cash receipts: October £ November £ December £

July sales

80%x 600,000x30% 144,000

August sales

80%x 560,000x50% 224,000

80%x 560,000x30% 134,400

September sales

80%x 620,000x20% 99,200

80%x 620,000x50% 248,000

80%x 620,000x30% 148,800

Example – contd.Cash budget – October to November

Cash receipts: October £ November £ December £

October sales

80%x 680,000x20% 108,800

80%x 680,000x50% 272,000

November sales

80%x 700,000x20% 112,000

Cash from credit sales

467,200 491,200 532,800

Cash budget – October to November

Cash receipts: October £ November £ December £

Cash sales 136,000 140,000 150,000

Credit sales 467,200 491,200 532,800

BAD DEBTS• Sales made on credit may result in bad debts• Some customers may never pay the debts that

are due• These should be excluded from the cash flow

forecast• Most businesses have an estimate of the

percentage of sales that will turn bad• We factor these into the forecast• REMEMBER We reduce down the last month

receipts by the % of bad debts.

BAD DEBTS

• Business makes credit sales in month 1• 30% pay the month following the invoice• The remainder pay two months after the

payment date• There is a 5% rate of bad debts

– Sales figure x 30% pay month 2– Sales figure x 65% pay month 3

TASK

• Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £320,000 , September - £360,000 and October - £400,000. What are the cash receipts from credit sales in November?

£

August sales

September sales

October sales

Total November Receipts

TASK - Answer

• Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £320,000 , September - £360,000 and October - £400,000. What are the cash receipts from credit sales in November?

£

August sales 320,000 x 25% 80,000

September sales 360,000 x 35% 126,000

October sales 400,000 x 40% 160,000

Total November Receipts 366,000

STUDENT TASKS

• Example cash flow – page 52• Example cash flow with bad debt – page 53• Activity 4 page 54• Activity 5 page 55

PAYMENTS FOR PURCHASES

• Work exactly the same as cash receipts!• We apportion the outflows according to our

payment profile• These are known as LAGGED payments.

PAYMENTS FOR PURCHASES

• Example page 56• Activity 6 page 57• Example page 57/58 – WATCH OUT in some

cases purchase figures may be forecast based on gross profit margin (revision)

SETTLEMENT DISCOUNTS

• Can be given for prompt receipt from customers• Can be received for prompt payment to suppliers• Will mean payments and receipts will be paid earlier• We reduce the in flow or out flow by the settlement

discount amount• E.g. 2% settlement discount on £50,000 of purchases

means we will only pay 98% - £49,000.

ExampleSales for the quarter

August sales £120,000

September sales £100,000

October sales £150,000

A settlement discount of 2.5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October?

£

August sales

September sales

October sales

Total October Receipts

ExampleSales for the quarter

August sales £120,000

September sales £100,000

October sales £150,000

A settlement discount of 2.5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October?

£

August sales 120,000 x 40% 48,000

September sales 100,000 x 50% 50,000

October sales 150,000 x 10% x 97.5% 14,625

Total October Receipts 112,625

OTHER PAYMENTS

• Wages and salaries (example page 59/60)• Overheads (example page 60)• Interest receivable and payable (example page

62/63)• Loans – activity 8 page 64.

Student Tasks

• Test your knowledge – page 70• Test your learning – BPP p 47 and 48• BPP Tasks Handout