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Cash-flow

Cash-flow. Aim: Explain how a cash flow works Objectives: Identify what makes-up a cash-flow Be able to work out relevant cash flow calculations Analyse and interpret cash flow. Word Clue. Cash Deficit Cash Inflow Cash outflow Cash Surplus Creditor Debtor Net Cash Flow. Cash flow.

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Cash-flow

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

  2. Word Clue • Cash Deficit • Cash Inflow • Cash outflow • Cash Surplus • Creditor • Debtor • Net Cash Flow

  3. Cash flow Cash 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. Raw materials Sales Loan Interest payments Debtors Van maintenance

  4. Cash Flow Forecast A cash flow forecast is a good way of predicting when the firm might face a liquidity problem.

  5. Example 1 £16,000 £22,000 £25,000 £35,000 £14,000 £20,000 £6,000 £0 £20,000 £35,000 £0 £6,000 £25,000 £22,000 £14,000 £16,000

  6. Example 2 £0 £1,150 Is total receipts in Jan: What was the loan amount in May: £305 £200 £1,000 £1,650 £150 £1,150 £0 £300 TRY AGAIN TRY AGAIN TRY AGAIN TRY AGAIN TRY AGAIN TRY AGAIN

  7. Example 2 £180 £360 The total payments in Jan were: The van costs in Apr were: £210 £320 £490 £0 £310 £180 £360 £150 TRY AGAIN TRY AGAIN TRY AGAIN TRY AGAIN TRY AGAIN TRY AGAIN

  8. Example 2 £1,025 £790 -£265 -£720 -£190 -£175 -£45 £1,025

  9. Now your turn You are required to complete a cash flow forecast. There are 4 ability levels.

  10. Can a profitable business run out of cash? Sales ฿40,000 (50% cash & 50% credit) Cost of sales ฿15,000 Opening Balance...... Cash inflow................ Cash outflow............. Closing balance....... ฿0 ฿20,000 ฿15,000 Gross Profit ฿25,000 ฿5,000

  11. Insolvency There 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

  12. Key terms... Working capital The amount of money a business has to meet its day-to-day needs. Liquidity Is the ability for a business to pay its short term debts. Insolvency Describes a situation when a business is unable to pay its debts.

  13. Homework Complete Activity 8.5 (Case Study) page 132.

  14. What have we learnt? Discuss with a partner before you share it with the class

  15. Example 3Cash-flow forecast 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

  16. 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?

  17. 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.

  18. 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........................................................

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