Cash-flow Aim: Explain how a cash flow works Objectives: 1.Identify what makes-up a cash-flow 2.Be able to work out relevant cash flow calculations 3.Analyse and interpret cash flow

Word Clue 1.Cash Deficit 2.Cash Inflow 3.Cash outflow 4.Cash Surplus 5.Creditor 6.Debtor 7.Net Cash Flow

Sales Debtors Loan Van maintenance Interest payments Raw materials Cash flow Cash flow is the flow of all the money into and out of the business. When a firm sells its products, money flows in. When it buys materials or pays wages, money flows out.

Cash Flow Forecast A cash flow forecast is a good way of predicting when the firm might face a liquidity problem.

Example 1 Jan 08Feb 08Mar 08Apr 08May 08Jun 08 Opening balance£5,000£7,000£4,000£6,000£15,000 Inflows£20,000£18,000£20,000£23,000£18,000 Total£29,000£22,000£26,000£33,000 Outflows£18,000£25,000£16,000£33,000 Closing balance£7,000£4,000£12,000£15,000 £25,000 £22,000 £6,000 £14,000 £35,000 £16,000 £20,000 £0

Example 2 Jan 08Feb 08Mar 08Apr 08May 08Jun 08 Opening bank balance£500£1,290£1,025£305£115-£60 Sales£150£155£200£300£315£325 Loan£1,000£0£200£0 Total receipts£155£400£300£315£325 Is total receipts in Jan: £1,000 £150£1,150 £1,650 £1,150 TRY AGAIN What was the loan amount in May: £0 £305 £0£300 £200 TRY AGAIN

Example 2 Jan 08Feb 08Mar 08Apr 08May 08Jun 08 Raw materials£150£200£310£250£230£110 Van costs£170 £750£190 Interest£40£50£60 £70 Total payments£420£1,120£490 £370 The total payments in Jan were: £210 £360£150 £320 £360 TRY AGAIN The van costs in Apr were: £490 £180£310 £0 £180 TRY AGAIN

Example 2 Opening bank balance£500£1,290£305£115-£60 Sales£150£155£200£300£315£325 Loan£1,000£0£200£0 Total receipts£1,150£155£400£300£315£325 Raw materials£150£200£310£250£230£110 Van costs£170 £750£180£190 Interest£40£50£60 £70 Total payments£360£420£1,120£490 £370 Net cash flow closing bank balance£1,290£305£115-£60-£105 £790-£265-£720-£190-£175-£45 £1,025

Now your turn You are required to complete a cash flow forecast. There are 4 ability levels. JanFebMarAprMayJunJulAugSepOctNovDec Opening bank balance£500£1,290£1,125£1,055£865£690£645£575£790£820£860£880 Sales£100£155£200£300£315£325£350£430£450£500£490£580 Debtors£50£100£0 £210£40£0 Loan£1,000£0£200£0 Total receipts£1,150£255£400£300£315£325£350£640£490£500£490£580 Raw materials£150£200£310£250£230£110£150£160£190£200£210 Van costs£170 £100£180£190 £200£195£200£190 £195 Loan Interest£40£50£60 £70 Total payments£360£420£470£490 £370£420£425£460 £470£475 Net cash flow£790-£165-£70-£190-£175-£45-£70£215£30£40£20£105 closing bank balance£1,290£1,125£1,055£865£690£645£575£790£820£860£880£985

Can a profitable business run out of cash? Sales ฿ 40,000 (50% cash & 50% credit) Cost of sales ฿ 15,000 Gross Profit ฿ 25,000 Opening Balance Cash inflow Cash outflow Closing balance ฿ 20,000 ฿0฿0 ฿ 15,000 ฿ 5,000

Insolvency There is a clear difference between profit & cash flow. Although the goods have been sold, the business has only received payment for 50% of them. Customers buying goods on credit will pay cash for them later months. Therefore, YES a profitable business can run out of money. This situation is called insolvency. Insolvency occurs when: Allowing customers too long a credit period By buying too many fixed assets, and thus having very little working capital

Key terms... Working capital The amount of money a business has to meet its day-to-day needs. Liquidity Is the ability for a business to pay its short term debts. Insolvency Describes a situation when a business is unable to pay its debts.

Homework Complete Activity 8.5 (Case Study) page 132.

What have we learnt? Discuss with a partner before you share it with the class

Example 3 Cash-flow forecast Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08 Opening bank balance£105£95£45-£190-£500-£895 Sales£350 £325£300£275£250 Loan£0 £1,000 Total receipts£350 £325£300£275£1,250 Each Column starts with an opening balance. The first column shows how much money is expected to be in the bank at the beginning of July In this example it is £105 The next row shows how much money the business expects to receive during July, in this example it is £350

Example 3 Cash-flow forecast Total payments is made up of the costs the business is expecting to pay out. In July 2008, the business expects to pay out £360 The business expects costs to rise in the next 6 months! Van costs have risen considerably, why? Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08 Raw materials£150£200£310£350£400£500 Van costs£170£200£250£260£270£280 Interest£40£0£50£100£150£140 Total payments£360£400£610£710£820£920

Example 3 Cash-flow forecast Closing balance are the most important figures, if the figure goes to low, the business has a cash flow (liquidity) problem. Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08 Opening bank balance£105£95£45-£240-£650-£1,195 Sales£350 £325£300£275£250 Loan£0 £1,000 Total receipts£350 £325£300£275£1,250 Raw materials£150£200£310£350£400£500 Van costs£170£200£250£260£270£280 Interest£40£0£50£100£150£140 Total payments£360£400£610£710£820£920 Net cash flow-£10-£50-£285-£410-£545£330 closing bank balance£95£45-£240-£650-£1,195-£865

What have we learnt? What a cash flow is. How to work out total receipts & total expenditure. Why cash flow forecast is important. How to input a cash flow on to a spreadsheet. And