Cash flow refers to the total money flowing into and out of a business and is important for meeting short-term expenses and maintaining business relationships. Cash flow forecasts can help businesses plan activities and make effective long-term decisions by providing appropriate information. Cash is considered more important than revenue or profits because a business needs cash to pay bills even if it is profitable, and can fail if cash is unavailable. For General Motors, effective cash management is important for inventory control, paying suppliers, and maintaining production during a recession when sales may decline due to economic factors hurting consumers.

1. CIMA Case Study
Q.1 What is meant by ‘cash flow’?
The total amount of money being transferred into and out of a business, especially as affecting
liquidity is called a cash flow.
Any movement/flow of cash into & out of the business through business activities is called cash
flow.
Q.2 Explain how cash forecast can help a business now & in the future.
At present the cash-flow forecast can help the business to meet its immediate expenses &
maintain healthy relation with its creditors & suppliers. It is a matter of liquidity, a firm’s ability
to meet its current obligations.
In future cash-flow forecast helps in planning & implementing of various business activities. Ex:
Production budgeting, credit policy etc. In long run the business can make effective decision
with the help of appropriate information in hand.
You can use your cash flow forecast to check if your business is meeting your expectations.
Comparing your actual income and expenses with your forecasts can identify areas where your
business is over or under performing. Reviewing your actual performance against your forecasts
alerts you to any variance so you can investigate and find out why there is a difference.
If your sales are higher or lower than forecast for example, you’d want to find out why. Are your
forecasts too high or too low? Has a competitor changed strategy or has a new competitor
entered your market? Do you have a customer service or quality control issue? Using forecasts in
this way allows you to actively manage your business. It empowers you to ask the right questions,
and ultimately make the right decisions.
Forecasting the cash-flows of a business is helpful in many ways. Basically from the planning
phase till the implementation phase of any business strategy, if there is an appropriate forecast of
cash-flows it could give a good base to plan & implement future business activities.
Q.3 Analyse why cash is considered to be more important to a business than revenue or profit.
Cash is the life blood of any business; No business can survive in the long run without proper
cash management.
Managing cash-flow is vital both to the survival of a business & to its long-term well-being.
Cash is very important asset to a business than revenue/ profits. Even though a business may be
trading profitably, it can still fall if cash is not available. Ex: Premier Football Club.
An example is where a business is making profit each month, but the owner has no cash to pay
the weekly wages bill. In this instance, it’s quickly apparent that the busine ss is owed a very large

2. amount by their debtors. The business had trading terms of 120 days from statement. So, the
business owner wrote to every customer who owed money and offered a 10 per cent discount on
seven-day terms. Within a month, the business has become cash positive and has never looked
back. So, in this situation, cash was most important, while profit came second.
Q.4 Evaluate the importance of cash-flow to a business of your choice. Explain how a recession
would most likely affect this business.
One of the most important numbers that business owners and their stakeholders should know is
the company’s cash flow from operations, which is often overlooked in lieu of the income
statement and balance sheet numbers. Being able to internally generate sufficient cash is the key
to maintaining a healthy business. A statement of cash flows serves as a map that tells where
cash came from and where it went, and is a crucial planning tool for any business’s long term
success.
Importance of cash-flow to General Motors:
1. Effective utilisation of cash:
The various sources & application of cash should be monitored in order to ensure there
is an effective & optimum utilisation of the cash.
2. Accounts Payables & Accounts Receivables:
The money owed to the suppliers who have supplied raw materials on credit terms. It is
importance to ensure timely payment is made to maintain healthy business relations.
Collection of money for the good sold on credit. This is a major source of cash-inflows,
to supports the business activities.
3. Manufacturing expenses:
To have an uninterrupted production process it is necessary to ensure minimum required
cash is available to meet the variable production expenses & other overhead expenses.
4. Inventory management:
Effective cash management can help in avoiding excess investment in inventory & also
to have an optimum level of inventory.
5. Borrow/invest cash.
This is a critical decision to be made by the business heads. In case of shortage of cash
from which source to be borrowed, at what rate & for how long. Usually a business can
borrow money from the money market to cater short-term business needs. When there is
excess of cash available the business can invest the excess money to make earnings out of
the ideally held cash.
6. Working Capital management.
Working capital is the minimum amount of capital required to carry out day-to-day
business operations. It helps in maintaining smooth flow of activities.
GM Working Capital (2013) = Current Assets - Current Liabilities
= 19.31 B
General Motors’ working capital last quarter has increased slightly over other quarters
last year though so perhaps management is beginning to focus on having more working
capital.

3. 7. Current Ratio:
It is the ratio of current assets over current liabilities. Is describes the ability of a business
to meet its current obligation through current assets. As a general rule, a business should
try to achieve a current ratio above 1:1 and as close to 2:1 as possible. The current ratio
of General Motors for 2013 is 1.33:1
8. Credit Policy:
The credit policy is the company's policy on when its customers should pay for goods or
services they have bought on credit. It is a policy for the collection of credit sales. To
encourage regular payment from customers companies provide discount to the
customers who make early payments.
Effects of recession on General Motor’s business
 Customer scarcity:
As consumers tighten their purse strings and spend their money just on essential items,
there could be a decline in sales.
 Increase in credit card debt:
Inflation is likely to happen during a recession, which means that expenses can be higher
than normal.
 Increase in cost of utilities:
The rising price of food, electricity and gas can put a big dent to the business. Increase in
monthly bills means lower income.
 Fluctuating cash flow:
The business becomes more of uncertain due to recession. The sources of cash and the
reliability on the sources become debatable.
 Low staff morale:
Slow periods mean sadder employees. As inflation eats into the pockets of employees,
they could ask for higher salaries in order for them to maintain their lifestyles.
 Rise in interest rates:
During recession the interest rates are tend to rise, as the credibility of customers &
business goes down. It becomes difficult to borrow capital.

4. Annual Income Statement of GM 2012-13 (values in 000's)
Period Ending: Trend 12/31/2013 12/31/2012 12/31/2011 12/31/2010
Net Income
$5,346,000 $6,188,000 $9,190,000 $6,172,000
Cash Flows-Operating Activities
Depreciation
$8,155,000 $38,950,000 $7,587,000 $7,065,000
Net Income Adjustments
$1,211,000 ($35,900,000) ($5,252,000) ($5,796,000)
Changes in Operating Activities
Accounts Receivable
$0 $0 $0 $0
Changes in Inventories
$0 $0 $0 $0
Other Operating Activities
($2,067,000) $1,419,000 ($3,456,000) ($992,000)
Liabilities
$0 $0 $0 $0
Net Cash Flow-Operating
$12,630,000 $10,605,000 $8,166,000 $6,780,000
Cash Flows-Investing Activities
Capital Expenditures
($7,565,000) ($8,068,000) ($6,249,000) ($4,202,000)
Investments
($5,184,000) $3,796,000 ($12,704,000) ($5,157,000)
Other Investing Activities
($1,613,000) $767,000 $6,213,000 $10,592,000
Net Cash Flows-Investing
($14,362,000) ($3,505,000) ($12,740,000) $1,233,000
Cash Flows-Financing Activities
Sale and Purchase of Stock
($2,438,000) ($5,098,000) $0 $3,389,000
Net Borrowings
$8,006,000 $1,412,000 $697,000 ($11,422,000)
Other Financing Activities
($150,000) ($116,000) ($139,000) $0
Net Cash Flows-Financing
$3,731,000 ($4,741,000) ($358,000) ($9,770,000)
Effect of Exchange Rate
($400,000) ($8,000) ($253,000) ($57,000)
Net Cash Flow
$1,599,000 $2,351,000 ($5,185,000) ($1,814,000)