Whose currency is this?

Free flowing… Free flowing… 1.13 Cash Flowing Forecasting Saturday, 01 October 2016 Objectives:  Explain the flow of cash through a business  Demonstrate the current asset cycle (stock – debtors – cash etc.)  Identify the difference between cash flow and sales revenue / profit

What is cash-flow?  Cash-flow is the movement of money into and out of a business  Working capital is the money available for the day-to-day running of a business at a point in time Cash income Cash outflow Working Capital

How does cash-flow work? The Cash Cycle CASH Customers (Debtors) STOCK Suppliers (CREDITORS) “Working Capital”

Profit Vs. Cash The biggest Business misconception!  Cash-flow is the movement of CASH into and out of a business  Profit is the revenue left over after all costs have been paid (surplus revenue)  Bankruptcy occurs when a business is unable to pay it’s debts as it has no cash to do so

Starter – what do these terms mean?  Cash flow statement  Cash flow forecast  ‘Net cash flow’  ‘Negative cash flow’

Cash flow key terms  A cash flow statement shows the actual cash flows of the business in the recent past (like a bank statement)  A cash flow forecast is a prediction of future cash flows into and out of a business  The difference between the money going into and out of the business is called ‘net cash flow’  If there is more money going out of the business than coming in the business has a ‘negative cash flow’

The structure of a cash-flow forecast 1. Income 2. Expenditure 3. Net cash flow (income minus expenditure) 4. Opening bank balance (always given in question) 5. Closing bank balance (opening balance plus net cash flow) Opening balance: £500,£2k Cash inflow £1k Cash outflow

Activity  Page 216

SupaMotors Item / Month January (£) February (£) March (£) April (£) May (£) Cash inflows Cash sales Credit sales Total inflows Cash outflows Rent Running & Admin costs Labour costs New car Tax bill Total inflows Net cash flow Opening bank balance £8,500 Closing bank balance

What do these images suggest are the causes of cash-flow problems? A Dam

What causes cash flow problems? All cash flow problems derive from one of three basic causes; 1. Insufficient Cash Inflows… 2. Excessive Cash Outflows… 3. Lack of Working Capital / Finance…

What causes cash flow problems? - Money flowing out faster than it flows in! 1. Poor Credit Control  Trade credit is a period of time allowed to customers to pay for purchases. This is typically c days  Debtors are allowed too long a period to pay  May offer customers (debtors) more credit to attract trade CASH Customers (Debtors) STOCK Suppliers (CREDITORS) Assume that this takes 30 days

Jan Feb Mar Apr May What causes cash flow problems? - Money flowing out faster than it flows in! 2. Over trading  Rapid expansion funded by ‘working capital’  Costs of production are paid before benefit of income is received CASH Customers (Debtors) STOCK Suppliers (CREDITORS) Assume that this takes 30 days Young's cost per unit is £1. The selling price includes a 20% profit margin. All transactions are in cash, but it takes an average of 30 days from buying materials until items are sold Bank (£)Income (£)Costs (£)Output

What causes cash flow problems? - Money flowing out faster than it flows in! 3. Other contributory factors  Inexperience – not knowing when inflows and outflows will occur  Unexpected events – a sudden rise in costs  Competitor actions – a price cut could see cash inflows and sales decrease  Seasonality – a significant issue for hotels in the UK  Operating below break-even output  Excessive stock levels

CREDITOR DEBTORDEBTOR Can you identify the five methods of improving cash flow shown here?

How Can Cash flow be improved  Reduce stock levels  Improve Credit control by reducing payment terms to debtors (customer)  Reschedule payments to prevent spikes in outflows  Sell assets of the business to generate cash  Extend trade credit terms with creditors (suppliers) to delay cash outflows  Overdraft  Increase initial investment in the business or add funds (savings/loans)

Cash Flow Clue-DOH!

Your Task  Answer questions to obtain clues  Examine the evidence  Decide the three main reasons why Peston Plastics went bust  In your group prepare a presentation on your interpretation of the data. You must come to a clear conclusion and back this up with evidence from the exhibits you have access to.

Five questions

Clues You can choose up to five pieces of evidence – one for each question answered correctly

Short-term cash flow can be improved by A Q1 B C D Extending the period of trade credit taken Increasing overheads Increasing the value of finished stocks Repaying a bank loan

Which of the following is a possible symptom of "overtrading"? A Q2 B C D A slowdown in sales Better profit margins An increase in stock turnover Taking longer to pay suppliers

Which one of these events might lead to a cash flow problem? A Q3 B C D Major supplier expands into China Govt cuts Corporation Tax rate Cost savings achieved on a large contract Customers ask for longer credit

Which of these defines the net working capital of a business? A Q4 B C D Trade debtors less trade creditors Cash balances less bank overdraft Current assets less current liabilities Fixed assets less depreciation

Cash flow could be improved by… A Q5 B C D Decreasing stock turnover Better credit control over trade debtors Reducing the gross profit margin Accelerating capital projects

Your choices (max 5) ExhibitContains 1 Balance sheet at 30 September Profit & Loss Accounts for 2011 & 2012 (9 months) 3 Cash Flow Forecast for 2012 (7 months actual) 4 Memo from Ray Bodger (Finance Director) 5 Financial ratio analysis for Peston Plastics 6 Newspaper clippings for Peston Plastics 7 Comparison with key competitors

Cash Flow Clue-DOH! Evidence Gathering Possible Causes of the Cash Flow ProblemYes / NoEvidence A: Low profits B: Management of trade debtors C: Management of stocks D: Management of creditors E: Overtrading F: Seasonal demand G: Unforeseen change H: Over-investment in fixed assets I: Bad luck J: Credit crunch

Your Choice of the Three Reasons Reason 1 Reason 2 Reason 3

Your Choice of the Three Reasons B E A

Does Your View Agree with the Receivers? STRICTLY CONFIDENTIAL Find Grabit & Sell Results of the investigation into the financial affairs of PESTON PLASTICS LIMITED Company Registration: IN RECEIVERSHIP