Cashflow – DH Jan 11 Cashflow Higher Business Management

Cashflow – DH Jan 11 Cashflow Management Cashflow management is all about the movement of money (cash) in and out of a business Cash and cash management are the most important aspects of business Without cash the business will fail A lack of cash is one of the most common reasons for business failure (especially new businesses)

Cashflow – DH Jan 11 Cash Movement CASH IN Profits Sale of fixed assets Sale of stock Decreases in debtors Capital introduced Loans received Increases in creditors CASH OUT Losses Purchase of fixed assets Purchase of stock Increases in debtors Drawings or dividends paid Loans repaid Decreases in creditors

Cashflow – DH Jan 11 Positive and Negative Cashflow

Cashflow – DH Jan 11 Liquidity The ability to have access to cash or near cash assets This allows the organisation to meet their everyday commitments The more liquid an organisation the better able it is to pay off short-term debts

Cashflow – DH Jan 11 Cashflow Statement The Cashflow Statement is NOT the same as a Cashflow Forecast It is historic, whereas a forecast/budget is based on future cashflow PLCs must provide a Cashflow Statement by law Small organisations are NOT required to publish cashflow statements, but are encouraged to do so Cashflow Statements show the sources and uses of cash during a financial period The purpose is to reconcile the increase/decrease in cash with the profit/loss for that year

Cashflow – DH Jan 11 Sources of Cash Flow Problems Tying up too much cash in stock Allowing customers too much credit Customers not paying within agreed credit terms Borrowing too much finance at high interest repayments Owners taking too many drawings Purchase of capital items (e.g. equipment) Low sales

Cashflow – DH Jan 11 How to Improve Cash Flow Offer discounts and promotions to encourage cash sales and reduce stock levels Sell any unnecessary fixed assets Encourage overdue customers to pay their bills Arrange credit with suppliers Seek another source of finance Owners draw less Purchase cheaper raw materials Purchase items on hire purchase

Cashflow – DH Jan 11 Questions 1.Identify 4 sources of cash flow problems and justify one solution for each source you have identified. (2005, Section 2, Q5d) (8 marks) 2.Distinguish between a Cash Budget and a Cashflow Statement. (2 marks)

Cashflow – DH Jan 11 Solutions 1.Identify 4 sources of cash flow problems and suggest one solution for each source you have identified. (2005, Section 2, Q5d) (8 marks) Sources of Cash Flow ProblemsSolutions Too much money tied up in stockIntroduce JIT Allowing customers too long to payOffer discounts to encourage prompt payment High levels of borrowing along with high interest rates Sell any unused assets Reduce loans by e.g. increasing number of investors Debtors not paying on timeDebt factoring High drawingsArrange overdraft/loan Low salesOffer discounts/promote cash sales Promote product or service Purchasing capital equipmentSale and leaseback Extended credit High expensesCut costs Reduce waste/economise Deferred payment (HP, leasing)

Cashflow – DH Jan 11 Solutions 2.Distinguish between a Cash Budget and a Cashflow Statement. (2 marks) A Cashflow Statement is a historical document, whereas a Cash Budget looks at future income and expenditure. A Cashflow Statement must be produced by PLCs by law, conversely a Cash Budget is not a legal requirement. A Cashflow Statement is for external purposes, however a Cash Budget is for internal use.

Cashflow – DH Jan 11 Questions 3.Explain why firms can have a healthy profit but experience cash flow problems. (2007, Case Study, Q5a) (4 marks) 4.Describe the term liquidity. (2 marks)

Cashflow – DH Jan 11 Solutions 3.Explain why firms can have a healthy profit but experience cash flow problems. (2007, Case Study, Q5a) (4 marks) Too much money tied up in stock Unwillingness to borrow due to high interest rates Owners take large drawings from profits Customers taking too much time to pay Customers allowed too much time to pay Allowing customers to have a high credit limit Difficulty in raising finance Purchasing large amounts of Fixed Assets (high capital expenditure)

Cashflow – DH Jan 11 Solutions 4.Describe the term liquidity. (2 marks) The ability to have, or have access to, sufficient cash, or near cash assets Purpose is to meet the everyday commitments of running an organisation It is vital for the short-term survival of the organisation Ability of current assets to meet current liabilities A "liquid" stock is a stock with a lot of volume that is easy to buy and sell