Cash Flow ACCOUNTING & FINANCE

Cash Flow Calculation and Interpretation of Cash Flow Forecast Movement of money into and out of a business.

Importance of Cash Flow  Essential to short-term survival  Poor cash flow - most common reason for failure

Shows expected cash inflows and, cash outflows and estimated bank balance, usually on a month by month basis over a period of 6 to 12 months. Cash Flow Cash Flow Forecast Calculation and Interpretation of Cash Flow Forecast

Importance of Cash Cash versus Profit Profit: difference between revenue and expenses. Eg: Sales £ 120,000. Costs £ 85,000. Profit = £ 35,000.

Importance of Cash Cash versus Profit However: If part of profit still owed by customers, profit may not / never be realised as cash. Also: Business may have more cash in bank than profit – may not yet have paid suppliers for services received.

Purpose  Cash might have to be borrowed.  Cash could be invested Identify periods when: Calculation and Interpretation of Cash Flow Forecast

 Cash inflows.  Cash outflows.  Opening and closing bank balance. Three main sections: Construction Calculation and Interpretation of Cash Flow Forecast

Net cash flow difference between inflows and outflows. Construction Calculation and Interpretation of Cash Flow Forecast

Not all goods / services are paid for immediately on receipt. Customers often given credit - usually 30 to 70 days. Timing of receipts / payments needs careful consideration. Importance of Timing Calculation and Interpretation of Cash Flow Forecast

Produce three-monthly cash flow forecast for business specialising in tailoring men ’ s suits, based on following: Example Calculation and Interpretation of Cash Flow Forecast

1.Opening balance - April - £ Forecast sales April, May, June - £ 4000, £ 5200, £ One quarter – immediately in cash. Remainder – one month later. NB Credit sales for March - £ Example Calculation and Interpretation of Cash Flow Forecast

3.Material costs - £ 1200, £ 1400, £ 1800 respectively. One month ’ s credit from suppliers. NB Material purchases for March - £ Example Calculation and Interpretation of Cash Flow Forecast

4.Wages - £ 1200, £ 1500, £ Paid directly to bank accounts - end of month. Some also paid in cash. Example Calculation and Interpretation of Cash Flow Forecast

5.Plans to purchase £ 6000 machinery - start of April. Paid - immediately by cheque. Example Calculation and Interpretation of Cash Flow Forecast

6.Telephone – payable quarterly - £ 300 forecast. Payable in June. Example Calculation and Interpretation of Cash Flow Forecast

7.Other expenses - £ 200 per month Example Calculation and Interpretation of Cash Flow Forecast

Problem in April & May - due to purchase of new machinery. Example Calculation and Interpretation of Cash Flow Forecast

 Overdraft  Credit  Leasing Options? Example Calculation and Interpretation of Cash Flow Forecast

Effective aid to decision making and control but … ….depends upon accuracy of amounts and timings. Perils Calculation and Interpretation of Cash Flow Forecast

Many factors outside firm ’ s control – degree of flexibility required, particularly if new business. Perils Calculation and Interpretation of Cash Flow Forecast

Consider best / worst case scenarios. Perils Calculation and Interpretation of Cash Flow Forecast

Prepare for worst, eg sales lower than expected, bad debts, rise in material costs. Perils Calculation and Interpretation of Cash Flow Forecast