CASH MANAGEMENT Cash Receipts and Payments

CASH FLOWS Life blood of a business Monitors surpluses Plan for shortfalls Plan for financing arrangements Allows planning of major purchases

TYPES OF CASH FLOWS Regular cash flows – The majority – Take place every day, week, month, quarter or annually e.g. wages, suppliers, customers, taxation payments Irregular – As the name implies don't happen on a regular basis e.g. Purchase of a non current (fixed) asset.

TYPES OF CASH FLOWS Exceptional cash flows – When something is not predicted For example Machinery breakdown Variable and fixed – Variable – amounts may change although timescale may not e.g. Customer sales and receipts or supplier payments (30 days, etc.) – Fixed will not e.g. Rent, unless there is a rent review

TYPES OF CASH FLOWS Capital and revenue payments – Capital - payments for fixed assets – Revenue - day to day transactions – E.g. Purchase of a company van is capital but the servicing will be revenue Capital and revenue receipts – Capital – cash injections into the business or share capital – Revenue – day to day receipts from trading.

TYPES OF CASH FLOWS Activity 2 – page 49 Payments that relate to the purchase of non- current assets would be A Capital payments B Regular revenue receipts C Drawings D Exceptional receipts

TYPES OF CASH FLOWS Activity 3 – page 49 Income received from an insurance claim for lost inventory would be classified as: A Capital payments B Regular revenue receipts C Drawings D Exceptional receipts

CASH BUDGETS Example of cash budget proforma October £November £December £ Cash receipts Total receipts Cash payments Total payments Net cash flow for the month Opening balance Closing balance

CASH BUDGETS Example pro-forma page 50 Example page

SALES RECEIPTS Cash sales – In flow takes place at same time as sale Credit sales – In flow takes place at some point in time after the sale – a LAGGED receipt (30/60 days) – Some customers do not adhere to terms! – Cash received in a month may contain proportions of sales from previous months.

Example Predicted Sales for the quarter October£680,000 November£700,000 December£750,000 Of these, 20% are cash sales and the remainder on credit. Experience shows that the customers pay according to the following profile: Payment profile The month after the sale20% Two months after the sale50% Three months after the sale30%

Example Sales from the previous quarter July£600,000 August£560,000 September£620,000 Again, 20% are cash sales and the remainder on credit. We can start to prepare the cash budget! Cash budget – October to November Cash receipts:October £November £December £ Cash sales (20% of month sales) 136,000140,000150,000

Example Cash budget – October to November Cash receipts:October £November £December £ July sales 80%x 600,000x30%144,000 August sales 80%x 560,000x50%224,000 80%x 560,000x30%134,400 September sales 80%x 620,000x20%99,200 80%x 620,000x50%248,000 80%x 620,000x30%148,800

Example – contd. Cash budget – October to November Cash receipts:October £November £December £ October sales 80%x 680,000x20%108,800 80%x 680,000x50%272,000 November sales 80%x 700,000x20%112,000 Cash from credit sales 467,200491,200532,800 Cash budget – October to November Cash receipts:October £November £December £ Cash sales136,000140,000150,000 Credit sales467,200491,200532,800

BAD DEBTS Sales made on credit may result in bad debts Some customers may never pay the debts that are due These should be excluded from the cash flow forecast Most businesses have an estimate of the percentage of sales that will turn bad We factor these into the forecast REMEMBER We reduce down the last month receipts by the % of bad debts.

BAD DEBTS Business makes credit sales in month 1 30% pay the month following the invoice The remainder pay two months after the payment date There is a 5% rate of bad debts – Sales figure x 30% pay month 2 – Sales figure x 65% pay month 3

TASK Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £320,000, September - £360,000 and October - £400,000. What are the cash receipts from credit sales in November? £ August sales September sales October sales Total November Receipts

TASK - Answer Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £320,000, September - £360,000 and October - £400,000. What are the cash receipts from credit sales in November? £ August sales320,000 x 25%80,000 September sales360,000 x 35%126,000 October sales400,000 x 40%160,000 Total November Receipts366,000

STUDENT TASKS Example cash flow – page 52 Example cash flow with bad debt – page 53 Activity 4 page 54 Activity 5 page 55

PAYMENTS FOR PURCHASES Work exactly the same as cash receipts! We apportion the outflows according to our payment profile These are known as LAGGED payments.

PAYMENTS FOR PURCHASES Example page 56 Activity 6 page 57 Example page 57/58 – WATCH OUT in some cases purchase figures may be forecast based on gross profit margin (revision)

SETTLEMENT DISCOUNTS Can be given for prompt receipt from customers Can be received for prompt payment to suppliers Will mean payments and receipts will be paid earlier We reduce the in flow or out flow by the settlement discount amount E.g. 2% settlement discount on £50,000 of purchases means we will only pay 98% - £49,000.

Example Sales for the quarter August sales£120,000 September sales£100,000 October sales£150,000 A settlement discount of 2.5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October? £ August sales September sales October sales Total October Receipts

Example Sales for the quarter August sales£120,000 September sales£100,000 October sales£150,000 A settlement discount of 2.5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October? £ August sales120,000 x 40%48,000 September sales100,000 x 50%50,000 October sales150,000 x 10% x 97.5%14,625 Total October Receipts112,625

OTHER PAYMENTS Wages and salaries (example page 59/60) Overheads (example page 60) Interest receivable and payable (example page 62/63) Loans – activity 8 page 64.

Student Tasks Test your knowledge – page 70 Test your learning – BPP p 47 and 48 BPP Tasks Handout