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# Money and finance management chapter 2

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### Money and finance management chapter 2

1. 1. MONEY & FINANCE MANAGEMENT
2. 2. COURSE SCHEDULE  CHAPTER 1: INTRODUCTION TO MONEY MANAGEMENT  CHAPTER 2: FINANCIAL FORECASTING AND BUSINESS  CHAPTER 3: BUSINESS ACCOUNTING  CHAPTER 4: FINANCIAL RESOURCES
3. 3. Chapter 2: Financial Forecasting and Business
4. 4. Revenue  Revenue is a total income of business gains out of total sales of the goods and services.  Price per unit X Number of units sold = REVENUE
5. 5. Costs (Expenses)  Fixed Costs: The costs do not vary according to quantity of goods and services sold. Utilities, salaries, advertising, rent, office supplies etc. These costs are the same every month.  Variable Costs: Costs vary in every production process. According to the activity of the production, the quantity of the goods and services produced, these costs increase or decrease. Total cost = FC + VC VC = cost per unit X quantity
6. 6. Profit = Revenue – Costs  Once a business is up and running, and is controlling its cash flow and making a profit, its directors and owners next thoughts turn to expansion.  Profit = Total Revenue – Total Cost
7. 7. Break-Even Analysis  At the break-even point, the sales revenue of the business equals to total expenses.  There is no profit or loss at this point.  By using break-even analysis, you can calculate out how much additional revenue will be required to cover any additional costs.  The business opportunities or evaluation can be analyzed.
8. 8. Break–Even Analysis  Total Revenue > Total Cost  Profit  Total Revenue < Total Cost  Loss  Total Revenue = Total Cost  Break – Even PointPrice Quantity Break Even Point Total cost Sales
9. 9. Break–Even Analysis  The break-even in units formula: Fixed Costs = Break-even in Units (Unit Price - Unit Cost)
10. 10. Cash Flow – Cash inflow – Cash outflow Cash inflow Cash outflow YOUR BUSINESS Cash flow is the money that is moving in and out of your business in a time period. Cash inflow: movements of cash into a business Cash outflow: movement of cash out of a business
11. 11. Cash Inflows  Cash Sales  Receipts from customers  Sale of assets  Investment  Personal funds  Receipt from bank loan  Government grants  Receipts from factoring
12. 12. Cash Outlow  Payments of wages and salaries  Payment of suppliers  Cost of equipment  Interest of bank loan  Payment of dividends  Payments of leasing or hire purchase of rentals  Income tax  VAT & Corporation tax
13. 13. Cash Balance  For ex: The following chart shows the Total Cash Inflow, Total Cash Outflow and Net Cash Flow of Company X. Jan Feb Mar Apr May Total Cash Inflow 60,000 55,000 60,000 66,000 54,000 Total Cash Outflow 63,000 60,000 60,000 63,000 58,000 Net Cash Flow -3,000 -5,000 0 3,000 -4,000 Net Cash Balance -3,000 -8,000 -8,000 -5,000 -9,000
14. 14. What is Working Capital?  Working capital is the money needed by a business for its day- to-day or immediate needs.  Cash or working capital is used to buy raw materials which are turned into finished goods and then sold to customers.  Businesses who hold too much working capital in stock are in effect wasting their cash as are businesses that do not chase customers who don’t pay on time.  Controlling the working capital cycle links closely with an accountant’s role to manage cash and forecast cash flow needs.
15. 15. What is a Cash-Flow Forecast?  A Cash Flow Forecast is an important financial tool. Cash flow forecasting is a one year analysis of the cash requirements to run the business.  It is a way of looking into future and gives the business an opportunity to take action to create financial plans before unwanted situations.  By forecastingthe business cash flow you can manage receipts and disbursements for your business.  By undertaking a cash flow forecast, a business can see what its cash requirements might be and arrange an overdraft or some other strategy to ensure that it does not face a liquidity crisis.
16. 16. Building a Cash-Flow Forecast There are 3 components of the cash-flow forecast; receipts, expenditures and cash flow. For each month in a year:  Write your Total Reciepts (Cash Inflow)  Write your Total Expenditure (Cash Outflows)  Calculate your Cash-Flow
17. 17. Structure of a Cash-Flow Forecast Jan Feb Mar Apr May Jun Totals Sales:credit 50,000 48,000 52,000 70,000 48,000 50,000 318,000 Sales: Cash 10,000 7,000 8,000 8,000 6,000 2,000 41,000 Total receipts 60,000 55,000 60,000 78,000 54,000 52,000 359,000 wages 30,000 34,000 32,000 32,000 32,000 32,000 192,000 Materials 12,000 5,000 7,000 8,000 3,000 5,000 40,000 Interest 3,000 3,000 3,000 3,000 3,000 3,000 18,000 Overheads 18,000 18,000 18,000 20,000 20,000 20,000 114,000 Total Outflows 63,000 60,000 60,000 63,000 58,000 60,000 364,000 Opening Bank Balance 0 -3,000 -8,000 -8,000 7,000 3,000 -5,000 Net Cash -3,000 -5,000 0 15,000 -4,000 -8,000 -5,000 Closing Bank Balance -3,000 -8,000 -8,000 7,000 3,000 -5,000 -10,000
18. 18. The Importance of Cash-Flow Forecasting For Managers  You can see the most effective way of using your cash.  You can track your cash inflows.  You can see your payment priorities.  You can measure the unexpected changes such as reduction in sales, late repayments, tight money situations.  You can have your paying details as written.  You can estimate how much money you need for your day-to- day or immediate day-to-day operations.  You can understand that you have enough cash to make your payments.