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 and interpret cash flow
 Word Clue
1. Cash Deficit
2. Cash Inflow
3. Cash outflow
4. Cash Surplus
5. Creditor
6. Debtor
7. Net Cash Flow
 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.

Loan
Interest
payments
 Cash Flow Forecast
A 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 £16,000 £15,000

Inflows £20,000 £22,000 £18,000 £20,000 £23,000 £18,000

Total £25,000 £29,000 £22,000 £26,000 £35,000 £33,000

Outflows £18,000 £25,000 £16,000 £14,000 £20,000 £33,000

Closing balance £7,000 £4,000 £6,000 £12,000 £15,000 £0

£20,000 £35,000 £0

£6,000 £25,000 £22,000

£14,000 £16,000
 Example 2

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

Opening bank
balance £500 £1,290 £1,025 £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

Is total receipts in Jan: What was the loan amount in May:

£1,000 £1,650 £305 £200

£150 £1,150 £0 £300

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

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

The total payments in Jan were: The van costs in Apr were:
£210 £320 £490 £0

£360 £150 £310 £180

TRY
TRY
TRY AGAIN
TRYAGAIN
AGAIN
AGAIN
 Example 2
Opening bank
balance £500 £1,290 £1,025 £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 £790 -£265 -£720 -£190 -£175 -£45

closing bank balance £1,290 £1,025 £305 £115 -£60 -£105

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

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Opening 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 £1,000 £0 £200 £0 £0 £0 £0 £0 £0 £0 £0 £0

Total receipts £1,150 £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 £105

closing 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 Opening Balance...... ฿0
Cash inflow................฿20,000
Gross Profit Cash outflow............. ฿15,000
฿25,000 Closing balance....... ฿5,000
 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
 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.
 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 3
Cash-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
The next rowstarts
showswith
how an opening
much moneybalance. The first
the business column
expects to shows how
receive during
much money
July, in is expected
this example it isto be in the bank at the beginning of July 2008.
£350
In this example it is £105
 Example 3
Cash-flow forecast
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-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

Total payments is made up of the costs the business is expecting

The business expects costs to rise in the next 6 months! Van
to pay out. In July 2008, the business expects to pay out £360
costs have risen considerably, why?
 Example 3
Cash-flow forecast
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Opening 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 £330

closing bank balance £95 £45 -£240 -£650 -£1,195 -£865

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