1. The nature of Cash Flows
As Business Studies
Mr Ahern

2. Lesson Objectives
•
•
•
•
Identify the meaning of cash-flow forecast
Identify what cash inflows and cash outflows
are
Understand the elements of cash flow
forecasting
Asses the use of cash-flow forecast

3. What is cash in business terms?
• Key Term: Cash in a business is the notes and
coins they have and also the money a business
has in the bank.
• Key Term: Cash flow is the movement of cash
in and out of the business.

4. Cash-flow diagram
The Tap
The Drain

5. You should have included the following – inflow
– The Tap
• From Sales
– Cash from sales
– Cash from credit sales (comes in after a time lag)
• From investors
– Cash from investors putting capital into the
business to buy a share in the business.
• From lenders
– Cash from a bank loan
• From disposal of assets
– E.g cash from disposal of assets e.g. selling cars.

6. You should have included the following –
outflow – The Drain
• Purchasing stock
• Paying creditors – these are people you owe money to e.g.
banks or other businesses
• Paying wages
• Paying rent
• Paying dividends to share holders
• Paying insurance
• Paying for advertising
• Paying tax
• Paying interest on debts
• Purchasing items on credit (when you pay for them at a later
date)

7. Task
• All of the money that would come into the business is known
as Receipts - The Tap
• All of the money that would go out of the business is known
as Payments - The Drain
• Set out your work in the table on the next slide.

8. How to set out your work
Nov 2010 (£)
Inflow/ Receipts
Outflow/ Payments

9. What is Net cash flow
• Key Term: Net cash flow is the amount of cash
left over once the outflow/ payments have
been subtracted from the inflow/ receipts.
• Net cash flow = Inflow (Tap) – Outflow (Drain)
• Or
• Net cash flow = Receipts - Payments

10. Business income
• If a business income in a given month is
greater than its expenditure (Cost), then a
positive cash-flow will be shown.
• Tap greater than drain = positive
• If expenditure is greater than income a
negative cash-flow will be shown
• Drain greater than tap = negative

11. The importance of cash
• If a business does not have cash then the following problems
could occur.
Business has a lack of cash
Business is unable to pay bills/staff
Suppliers stop delivering as
they have not been paid.
Business may be taken to court
because they can’t pay creditors
(people they owe money to)
Business becomes insolvent
(can no longer pay its debts)

12. What is a cash flow forecast?
• A business needs to plan to ensure it has
enough cash to survive. To plan for this a
business will create a cash flow forecast.
• Key Term: A cash flow forecast is a prediction
of how cash will flow in and out of a business
over a period of time.

13. Why would a business use a cash flow
forecast
• A business will use a cash flow forecast to
– See if the business expects to have a suitable
amount of cash to survive
– See if the business needs to take any actions to
avoid a shortage of cash in the business at any
given time
– See how well the business should be performing
after a period of time.
– Show to the bank to discuss if a loan is needed
and how a loan would be repaid.

14. Example Cash Flow Forecast
(£)
Total Receipts
Total Payments
Net Cash Flow
Opening Bank
Balance
Closing bank
balance
Jan Feb
Mar
Apr May
June

15. Example Cash Flow Forecast
• Key Term: Opening balance is the amount of cash in
the business at the start of each month (Water in the
sink)
(£)
Total Receipts
Total Payments
Net Cash Flow
Opening Bank
Balance
Closing bank
balance
Jan Feb
Mar
Apr May
June

16. Example Cash Flow Forecast
• Key Term: Closing Balance becomes the opening
balance at the start of the next month (Water left
over in the bath)
(£)
Total Receipts
Total Payments
Net Cash Flow
Opening Bank
Balance
Closing bank
balance
Jan Feb
Mar
Apr May
June

17. Example Cash Flow Forecast
•
•
•
Key Term: Closing balance is the amount of cash in the business at the
end of each month. (water left in the sink)
The closing balance is calculated by adding the net cash flow onto the
opening balance
Closing balance = opening balance + net cash flow
(£)
Jan Feb
Mar
Apr May
June
Total Receipts
Total Payments
Net Cash flow
Opening Bank
Balance
Closing bank
balance
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING BALANCE OF THE PREVIOUS MONTH

18. Task
• Complete the following cash-flow forecast for
Monsieur LePlonk
(£)
Jan Feb Mar
Apr
May
June
Receipts
1,500 1,200 900
2,000
2,100
2,400
Payments
1,400 1,200 800
1,700
1,750
1,800
Net Cash flow
Opening
Balance
0
Closing
Balance
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH

19. Task
• Complete the following cash-flow forecast for
Monsieur LePlonk
(£)
Jan Feb Mar
Apr
May
June
Receipts
1,500 1,200 900
2,000
2,100
2,400
Payments
1,400 1,200 800
1,700
1,750
1,800
Net Cash flow 100
0
100
300
350
600
Opening
Balance
0
100
100
200
500
850
Closing
Balance
100
100
200
500
850
1450
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH

20. Task
• Complete the cash flow forecast for Shelly Isfit
(£)
Jan Feb Mar
Apr
May
June
Receipts
800
1000
700
700
500
400
Payments
600
700
800
800
700
700
Net Cash flow
Opening
Balance
0
Closing
Balance
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH

21. Task
• Complete the cash flow forecast for Shelly Isfit
(£)
Jan Feb Mar
Apr
May
June
Receipts
800
1000
700
700
500
400
Payments
600
700
800
800
700
700
Net Cash flow 200
300
-100
-100
-200
-300
Opening
Balance
0
200
500
400
300
100
Closing
Balance
200
500
400
300
100
-200
NOTE THAT THE OPENING BALANCE IS THE SAME AS THE CLOSING
BALANCE OF THE PREVIOUS MONTH

22. Reasons for cash flow improvement
• Increased sales
• More efficient credit sales (they are paying
earlier)
• Reduced fixed costs
• Reduced variable costs
• Investments maturing

23. Questions
• Look at the cash flow forecasts for Monseir LePlonk
and Shelly Isfit.
• What would be the consequences to Shelly’s
business if her cash flow forecast is correct?
• What actions could she take to avoid any cash
problems?
• What could be a reason for Monsieur LePlonk’s cash
flow improving over the months?

24. Homework!!
• Make sure you write up
notes from todays
lesson on Cash-flow by
next lesson on Thursday
• Have a nice day 