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Cash flow management complete
- 2. What is cash flow? The amounts of money flowing into and out of a business over a period of time NB CASH FLOW IS NOT THE SAME THING AS PROFIT
- 3. What are cash inflows? Receipts of cash Cash flows into a business from: - sales of goods and services - payments by debtors (people who OWE the business money) - money received from loans from the bank - interest received from cash in the bank - sales of assets (things the business owns)
- 4. What are cash outflows? Payments of cash Cash flows out of a business from: - purchase of raw materials and wages etc - money paid to creditors (people to whom the business owes money) - money used to repay loans to the bank - payment of rent - buying assets - payment of interest on loans
- 5. Visualising cash flow The difference between the amount of money flowing into a business and the amount flowing out is important See what happens when there is a positive cash flow See what happens when there is a negative cash flow
- 6. Cash flow forecasting The process of estimating the expected cash inflows and cash outflows over a period of time
- 7. Why forecast cash flow? To identify likely cash flow problems - to ensure that bills can be paid To enable the firm to plan expenditure - to ensure expenditure takes place when there is sufficient cash To allow time to seek additional cash - to seek overdraft facility from a bank or a loan to cover major expenditure To avoid going into liquidation - businesses that can’t pay their bills face liquidation
- 8. Constructing a cash flow forecast Key terms: Opening balance – amount of cash the business starts with in any month or year Cash inflow – money coming in Cash outflow – money going out Net cash flow – difference between money coming in and money going out Closing balance – the opening balance + net cash inflow
- 9. Task 1 Complete the cash flow forecast for Fun for Kids Ltd on p117 and 118 of your textbook
- 10. Causes of cash flow problems Seasonal demand Losses Too many credit sales Overtrading Over- investment The unforeseen Too high stock
- 11. Perils of cash flow forecasts Changes in the economy New competitors Changes in consumer tastes Poor market research Uncertainty
- 12. Task 2 Using pp113 – 115 of your textbook create a mind map of the different ways in which cash flow can be improved Identify the pros and cons of each method
- 13. Task 2 Class discussion of Practice Exercise 2: Fun for Kids Ltd, Qs 2 - 4
- 14. Task 3: Case Study: VKP Limited pp118 - 119 Qs 1 - 5
- 15. Homework assignment Question 1: What is meant by the term ‘cash outflow’? Use your textbook here to reproduce an accurate definition
- 16. Homework assignment Question 2: Identify two other items that could be included under the heading ‘cash inflows’ Refer to the textbook definition of cash inflows and list two cash inflows other than sales revenue
- 17. Homework assignment Question 3: Calculate (a) VKP’s predicted ‘purchases’ in August Cash outflows = £64,000 Wages, drawings, admin costs = £8,000 Purchases = £64,000 - £8,000 = £56,000
- 18. Homework assignment Question 3: Calculate (b) VKP’s closing balance in December Closing balance = Opening balance +/- net inflow = £100,000 - £51,000 = £49,000
- 20. Homework assignment Question 4: Reasons include: No credit terms No need to hold stock Credit received on stock Few seasonal variations VAT second largest outflow
- 22. Homework assignment Question 5: Suggest at least 2 implications Apply them to the case Explain / analyse them Make a judgement on them and conclude
- 23. Homework assignment Question 5: Aim to balance your answer Disadvantages Likely to worsen cash flow in short term Increases the risk of bad debt Increase admin costs
- 24. Homework assignment Question 5: Aim to balance your answer Advantages May increase sales May earn interest on credit
- 25. Homework assignment Question 5: Don’t forget to make judgements Definite decrease in cash flow vs potential increase in profit Cash flow currently stable Closing balances not very large Need for overdraft
Editor's Notes
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting
- To reduce risk business activity is risky – who knows what might happen in the market? good practice to consider a range of scenarios and address them before they impact on the business To set objectives and methods by which they can be achieved without clear objectives a business might drift or ‘satisfice’ To communicate objectives clear objectives, well communicated, may improve motivation and productivity creates a sense of a common purpose To monitor progress performance can be checked against objectives and targets To help raise finance investors and lenders are ‘risk averse’ they need persuading to part with cash! To anticipate the need for additional finance a key feature of cash flow forecasting