Cash flow THE TIMES 100

What is cash? Cash is notes, coins and bank deposits that provide firms with the spending power to pay their bills and expenses

Cash flow Cash flow refers to the flows of cash both into and out of a business Cash inflows are payments into a firm from customers or other sources Cash outflows refer to payments made by a business Net cash flow=cash inflow–cash outflow

Cash flow forecasting Cash inflows result from: Cash sales from customers Payments from debtors Cash from other sources such as bank loans Cash outflows result from: Paying overheads such as rent & wages Paying for raw materials & other variable costs

Cash flow forecasting A cash flow forecast will include: Cash inflows (receipts) Cash outflows (payments) Net cash flow (inflows minus outflows) Opening balance (this is the same as the closing balance of the previous period) Closing balance (opening balance combined with net cash flow)

Cash flow forecasting Jan Feb March April May June Cash inflows £17,000 £18,500 £19,000 £19,800 £21,000 £18,900 Cash outflows £14,300 £15,100 £24,900 £16,300 £17,800 £24,800 Net cash flow £2,700 £3,400 (£5,900) £3,500 £3,200 Opening balance £2,200 £4,900 £8,300 £2,400 £5,900 £9,100 Closing balance

Importance of cash flow forecasting To identify periods of cash shortfall so action can be taken to deal with this To identify periods of cash surplus so expenditure can be planned To secure additional funding, for example, from a bank

Consequences of cash flow problems If a firm does not have the cash to pay its debts: Relationships with suppliers may deteriorate Workers may leave It may have to cease trading In the short-term CASH is considered to be more important than PROFIT

Causes of cash flow problems Poor planning External factors e.g. the credit crunch Inadequate credit control Holding excessive stock Investing too heavily in fixed assets Overtrading – expanding quicker than available funds allow

Improving cash flow In simple terms, cash flow can be improved by: Increasing, or speeding up, cash inflows Decreasing, or slowing down, cash outflows

Methods of improving cash flow Increase & speed up cash inflows Decrease & slow down cash outflows Overdraft or bank loan Delay paying creditors Debt factoring Delay unnecessary capital spending Sale of assets or ‘sale & leaseback’ Lease rather than buy Shorten credit terms for customers & chase up debts Reduce spending on expenses e.g. negotiate lower rent

Do not confuse cash and profit Cash v profit Do not confuse cash and profit The receipt of cash may not coincide with an associated sale, for example: An item may be bought on credit and paid for at a later date A bank loan may be taken out causing a positive cash flow, but no sales have been made

Cash flow in context

Fill the gaps January February March Cash inflow £10,000 £11,000 ? Cash outflow £9,000 £11,500 £10,800 Net cash flow £1,000 £400 Opening balance £1,600 £1,100 Closing balance £1,500 Jan opening balance = £600 February net cash flow = (£500) March cash inflow = £11,200 What are the missing figures? Use the CIMA case study to help you

Controlling cash Management accountants deal with a range of issues related to controlling cash in organisations. Give examples of these activities. Use the CIMA case study to help you Examples include: Ensuring sufficient cash is available for investment by not tying up cash in stock unnecessarily Putting procedures in place for chasing up outstanding debt Controlling different levels of cash outflows in relation to the size of the business

Managing cash shortfalls Trained management accountants will forecast when there may be possible cash shortfalls and have strategies in place to deal with these. What might a business do if a possible shortfall has been forecast, to ensure it can pay its creditors? Use the case study to help you. Borrow money e.g. Arrange a larger overdraft or take out a short term loan Improve cash flow by making better use of assets, negotiating payments with suppliers or offering discounts to customers for early payments

Effective forecasting Organisations operate within dynamic business environments so management accountants must take a range of external factors into account when forecasting cash flow. Give examples of changes that may affect cash flow forecasts. Use the CIMA case study to help. Examples include: Tastes change Suppliers increase prices Interest rates go up or down The economy moves through the business cycle

Useful resources Cash flow lesson suggestions and activities (The Times 100) CIMA case study (The Times 100) CIMA website