Cash-flow Aim: Explain how a cash flow works Objectives: 1.Identify what makes-up a cash-flow 2.Be able to work out relevant cash flow calculations 3.Analyse.

Cash-flow

Aim: Explain how a cash flow works

Objectives:1. Identify what makes-up a cash-flow2. Be able to work out relevant cash flow

calculations3. Analyse and interpret cash flow

Word Clue

1. Cash Deficit2. Cash Inflow3. Cash outflow4. Cash Surplus5. Creditor6. Debtor7. Net Cash Flow

Sales

Debtors

Loan

Van maintenance

Interest payments

Raw materials

Cash flowCash flow is the flow of all the money into and out of

the business. When a firm sells its products, money

flows in. When it buys materials or pays wages, money

flows out.

Cash Flow ForecastA cash flow forecast is a good way of predicting when the firm might

face a liquidity problem.

Example 1

  Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08

Opening balance £5,000 £7,000 £4,000 £6,000 £15,000

Inflows £20,000 £18,000 £20,000 £23,000 £18,000

Total £29,000 £22,000 £26,000 £33,000

Outflows £18,000 £25,000 £16,000 £33,000

Closing balance £7,000 £4,000 £12,000 £15,000

£25,000

£25,000

£22,000

£22,000

£6,000

£6,000

£14,000

£14,000

£35,000

£35,000

£16,000

£16,000

£20,000

£20,000

£0

£0

Example 2

  Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08Opening bank balance £500 £1,290 £1,025 £305 £115 -£60

Sales £150 £155 £200 £300 £315 £325

Loan £1,000 £0 £200 £0 £0

Total receipts £155 £400 £300 £315 £325

Is total receipts in Jan:

£1,000

£150 £1,150

£1,650

£1,150

TRY AGAINTRY AGAINTRY AGAIN

What was the loan amount in May:

£0

£305

£0 £300

£200

TRY AGAINTRY AGAINTRY AGAIN

Example 2   Jan 08 Feb 08 Mar 08 Apr 08 May 08Jun 08

Raw materials £150 £200 £310 £250 £230 £110

Van costs £170 £170 £750 £190 £190

Interest £40 £50 £60 £60 £70 £70

Total payments £420 £1,120 £490 £490 £370

The total payments in Jan were: £210

£360 £150

£320

£360

TRY AGAINTRY AGAINTRY AGAIN

The van costs in Apr were:

£490

£180£310

£0

£180

TRY AGAINTRY AGAINTRY AGAIN

Example 2Opening bank balance £500 £1,290 £305 £115 -£60

Sales £150 £155 £200 £300 £315 £325

Loan £1,000 £0 £200 £0 £0 £0

Total receipts £1,150 £155 £400 £300 £315 £325

Raw materials £150 £200 £310 £250 £230 £110

Van costs £170 £170 £750 £180 £190 £190

Interest £40 £50 £60 £60 £70 £70

Total payments £360 £420 £1,120 £490 £490 £370

Net cash flow

closing bank balance £1,290 £305 £115 -£60 -£105

£790 -£265 -£720 -£190 -£175 -£45

£1,025

£1,025

Now your turnYou are required to complete a cash flow forecast. There are 4 ability levels.

  Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecOpening bank balance £500

£1,290

£1,125

£1,055 £865 £690 £645 £575 £790 £820 £860 £880

Sales £100 £155 £200 £300 £315 £325 £350 £430 £450 £500 £490 £580

Debtors £50 £100 £0 £0 £0 £0 £0 £210 £40 £0 £0 £0

Loan£1,00

0 £0 £200 £0 £0 £0 £0 £0 £0 £0 £0 £0

Total receipts£1,15

0 £255 £400 £300 £315 £325 £350 £640 £490 £500 £490 £580

Raw materials £150 £200 £310 £250 £230 £110 £150 £160 £190 £200 £210 £210

Van costs £170 £170 £100 £180 £190 £190 £200 £195 £200 £190 £190 £195

Loan Interest £40 £50 £60 £60 £70 £70 £70 £70 £70 £70 £70 £70

Total payments £360 £420 £470 £490 £490 £370 £420 £425 £460 £460 £470 £475

Net cash flow £790 -£165 -£70 -£190 -£175 -£45 -£70 £215 £30 £40 £20 £105closing bank balance

£1,290

£1,125

£1,055 £865 £690 £645 £575 £790 £820 £860 £880 £985

Can a profitable business run out of cash?

Sales฿40,000 (50% cash & 50% credit)

Cost of sales฿15,000

Gross Profit฿25,000

Opening Balance......Cash inflow................Cash outflow.............Closing balance.......

฿20,000฿0

฿15,000฿5,000

InsolvencyThere is a clear difference between profit & cash flow.

Although the goods have been sold, the business has only received payment for 50% of them. Customers buying goods on credit will pay cash for them later months.

Therefore, YES a profitable business can run out of money. This situation is called insolvency.

Insolvency occurs when:•Allowing customers too long a credit period•By buying too many fixed assets, and thus having very little working capital

Key terms...

Working capital The amount of money a business has to meet its day-to-day needs.

LiquidityIs the ability for a business to pay its short term debts.

InsolvencyDescribes a situation when a business is unable to pay its debts.

Homework

Complete Activity 8.5 (Case Study) page 132.

What have we learnt?

Discuss with a partner before you

share it with the class

Example 3Cash-flow forecast

  Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Opening bank balance £105 £95 £45 -£190 -£500 -£895

Sales £350 £350 £325 £300 £275 £250

Loan £0 £0 £0 £0 £0 £1,000

Total receipts £350 £350 £325 £300 £275 £1,250

Each Column starts with an opening balance. The first column shows how much money is expected to be in the bank at the beginning of July 2008. In this example it is £105

The next row shows how much money the business expects to receive during July, in this example it is £350

Example 3 Cash-flow forecast

Total payments is made up of the costs the business is expecting to pay out. In July 2008, the business expects to pay out £360

The business expects costs to rise in the next 6 months! Van costs have risen considerably, why?

Jul-08Aug-

08Sep-

08 Oct-08Nov-

08Dec-

08

Raw materials £150 £200 £310 £350 £400 £500

Van costs £170 £200 £250 £260 £270 £280

Interest £40 £0 £50 £100 £150 £140

Total payments £360 £400 £610 £710 £820 £920

Example 3 Cash-flow forecast

Closing balance are the most important figures, if the figure goes to low, the business has a cash flow (liquidity) problem.

  Jul-08Aug-08 Sep-08 Oct-08 Nov-08 Dec-08Opening bank balance £105 £95 £45 -£240 -£650 -£1,195

Sales £350 £350 £325 £300 £275 £250

Loan £0 £0 £0 £0 £0 £1,000

Total receipts £350 £350 £325 £300 £275 £1,250

Raw materials £150 £200 £310 £350 £400 £500

Van costs £170 £200 £250 £260 £270 £280

Interest £40 £0 £50 £100 £150 £140

Total payments £360 £400 £610 £710 £820 £920

Net cash flow -£10 -£50 -£285 -£410 -£545 £330closing bank balance £95 £45 -£240 -£650 -£1,195 -£865

What have we learnt?• What a cash flow is.• How to work out total receipts & total

expenditure.• Why cash flow forecast is important.• How to input a cash flow on to a

spreadsheet.• And.....................................................

...