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BUSINESS AND MANAGEMENT

BUSINESS AND MANAGEMENT. ACCOUNTING AND FINANCE Cash Flow Forecasts. Cash Flow Forecasting. Why do businesses prepare cash flow forecasts

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BUSINESS AND MANAGEMENT

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  1. BUSINESS AND MANAGEMENT ACCOUNTING AND FINANCE Cash Flow Forecasts

  2. Cash Flow Forecasting Why do businesses prepare cash flow forecasts Cash flow forecasts are drawn up to helpcontrol and monitor cash flow in the business. The following are some advantages of using statements to control cash flows. • Identifying the timing of cash shortages and surpluses. 2. Supporting applications for funding. 3. Enhancing the planning process. 4. Monitoring cash flow.

  3. Cash Flow Forecast Cash Flow Forecast: This relates to the expected inflow and outflow of cash. Cash Flow Statement: This relates to the actual flow (in and out) of cash during the past time period. CASH Used to acquire resources Goods and services sold for cash Resources used to make goods and services The continuous Cash Flow into and out of the business

  4. Why Cash flow is important to business • Without sufficient cash flow businesses would not be able to pay its many creditors on time. The possible implications are: creditors may stop supplying goods or impose strict conditions such as ‘cash on delivery’;discounts will be lost for prompt payments of bills;other traders will be less prepared to deal with the firm except on a cash basis. • Wages and salary may not be paid on time and this will cause poor motivation;absenteeism;high labour turnover; and industrial unrest. • New capital assets cannot be afforded and this can reduce business efficiency. • Tax bills may not be paid

  5. Cost of holding too much cash • Loss of interest: Although there may be a token amount of interest earned on current accounts, it will be nowhere near the interest rate for long-term accounts. • Loss of purchasing power: Unless the rate of interest is more than the rate of inflation, the money held in a bank account will actually lose its purchasing power. • Opportunity Cost: Investors do not invest money in a business for the business to store it in a bank account. Investors expect a business to take well managed risks with their money; in the money is in a bank account, the business is possible risk –averse and the investors may remove their investment. Question: What are the costs associated with a business holding too little cash?

  6. Causes of cash flow problems • Overtrading • Holding too much stock • High borrowing – therefore high interest payments. • Allowing too many goods to be bought on credit. • Businesses that rely on seasonal trade – during the time that sales are very low, cash still needs to be spent on running the businesses. • High unemployment.

  7. The Relationship between profit and cash Note: A profitable business may run out of cash, whilst the business recording a loss may have a cash surplus. How is this possible? • The business may be selling more of its output on credit. Therefore a profit is being made as the goods are being recorded and sold, but the cash payment form customers will be receivedsometime in the future. This period of credit may leave the firm dangerously short of cash. • The business may receive cash at the beginning of the trading year from sales made in the previous year. This would increase the cash balance but not affect profit. • A business may buy resources from its suppliers and not pay for them until the next trading year. As a result the trading cost will not be the same as the cash paid out. • When additional capital is introduced into the business this will increase the cash balance, but have no effect on profit. This is because capital is not treated as revenue in the Profit and LossAccount. • The purchase of fixed assets will reduce cash balance but have no effect on the profit a company makes. This is because the purchase of an asset is not treated as an expense in the Profit andLoss Account. • Sale of fixed assets will increase cash balances but have no effect on profit unless a profit or loss is made on the disposal of the asset. This is because profit from the sale of an asset is not included in the business turnover. Activity: Question # 4, Unit 46, page 327 Hall Jones and Raffo, Business Studies, 3rd Edition.

  8. Cash Flow Forecasting The receipts of the business represents the monthly income of cash. Payments are the outflows from the business. Some payments are often for the same regular amounts. Net Cash Flow for each month is found by subtracting total payments from total receipts. The opening balance in January will be the value of December’s closing balance in the previous year. The closing balance for one month is found by adding or subtracting the net cash flow for the month for the opening balance.

  9. The following cash-flow forecast is for ‘Plants4U’ flower shop which is about to begin trading (all figures in $000s) • Calculate the missing values X and Y. • State two ways in which the business might be able to improve its forecasted cash flow. • Complete the table for December based on the following forecasts • Sales revenue raises by 10% from November. • Capital expenditure is double the November level. • Labour and material costs increase by 25%

  10. Example of Cash Flow Statement

  11. Managing Cash Flow Managing the floe of cash in and out of the business is one of the most important tasks of management. In order to do this effectively managers will need to assess: • The likely timing of cash flow in d out of the business. This will largely depend on how long debtors take to pay their bills. • The size and likely timing of payments out of the business; this will largely depend on the costs of the business and period of credit offered by the suppliers. • Whether there are sources of finance to cover periods when cash shortage could rise. Time is of great significance to cash flow management

  12. Dealing with Cash-Flow Problems • Reduce or delay expenditure • Obtain cheaper supplies • Rent or lease equipment rather than buying it outright • Delay the payment of bills – extending the credit period • Get cash in more quickly from the sale of goods • Use debt factor to release cash from debts • Obtain overdrafts or short term loans Question: What are the advantages and disadvantages associated with these methods of dealing with cash flow problems? Handout: Methods of improving Cash Flow, Advantages and Drawbacks

  13. Case Studies Westview Caravans Source: Unit 46, page 329, Jones, Hall, Raffo, Business Studies 3rd Edition Tourist Trinkets Limited Source: Unit 5, pages 461-467, Stimpson,AS and A Level Business Studies Setting up in Business Source: Unit 5, pages 461, Stimpson,AS and A Level Business Studies Windrush Training Services Source: Unit 54, page 380, Jones, Hall, Raffo, Business Studies 3rd Edition

  14. BIBLIOGRAPHY 1.Barratt Michael and Mottershead Andy. AS and A Level Business Studies, Pearson Education Ltd,2000. 2.Jewell Bruce. An Integrated Approach to Business Studies, 4th Edition, Pearson Education Ltd 2000. 3. Hall Dave, Jones Rob, Raffo Carlo. Business Studies, 3rd Edition, Causeway Press Ltd, 2004. 4. Stimpson Peter. AS and A Level Business Studies, Cambridge University Press, 2000. www.bized.ac.uk WWW.NetMBA.com

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