Topic B.2b Cash flow forecasting Here are some of the terms we will use in this presentation, can you work out what they are? PRICE SETmoney coming into the business MAN TYPESmoney going out of the business ASCOT REFmaking predictions into the future ABLE CANwhat is left in the bank

T OPIC B.2 B C ASH FLOW FORECASTING By the end of this topic you will be able to: Explain the purpose of a cash flow forecast Identify inflows and outflows Understand the sources of inflows Understand the destinations of outflows Identify the impact of timings of inflows and outflows Understand the benefits of using cash flow in planning Complete a cash flow forecast from given information Analyse a business’ finances based on cash flow and identify possible issues for a business from any cash surplus or deficit

C OLIN ’ S C ASH F LOW It was Friday morning and as usual Colin was both running late and had no money in his wallet. He was about to run out of the house when he realised he hadn’t got his dinner money. He shouted to his Mum, but unfortunately she had forgotten to go to the bank the night before and had only £1.50 cash, which she gave to Colin. “Don’t worry” she said, “Mr Brown owes you £3.00 change from your revision book you bought yesterday and you have Maths today.” Colin just caught the bus which cost him 90p and got to school on time. During the first lesson his friend Robbie gave him back 50p he had borrowed earlier in the week. At morning break Colin went to the tuck shop where he spent 75p on a drink and a cookie. At lunch Colin selected his favourite sandwich and water which would have cost him £1.60, before he realised he was short of cash. He put it back and slumped off hungrily. After lunch break he had Maths and was given the £3.00 owed by Mr Brown. How much money did Colin have at the start of the day? Why was he unable to pay for his lunch? How much money did Colin have at the end of the day? What could Colin have done to solve his lunch time problem?

C ASH FLOW FORECAST Cash flow forecast Identifies the money that should be coming into the business (inflow) and the money going out of the business (outflow) Identifies cash flow over a period of time Cash flow The movement of money in and out of a business Cash inflow Money that flows into the business Receipts Cash sales Receipts from earlier credit sales Cash outflow Money that flows out of the business Purchases Cash purchases Payments for earlier credit purchases Can you explain what is meant by credit sales and credit purchases?

C ASH INFLOWS AND CASH OUTFLOWS Cash inflows Where does money flowing into a business come from? When starting up? Entrepreneur’s own savings Investment from family and friends Issuing shares if a company Bank loan When expanding? Bank loan Further investment from shareholders On a day to day basis? Sales of goods and services

C ASH INFLOWS AND CASH OUTFLOWS Cash outflows Where does money go when it flows out of a business? When starting up? When expanding? On a day to day basis? Use your earlier knowledge of start-up costs and operating costs to give examples of cash outflows.

Q UESTION TIME 2 MARKS The owner of a florists is completing a cash flow forecast and wants to identify cash inflows for the business. Which two of these are cash inflows? Annual rent Personal investment Delivery van Sales incomeStaff wagesWeb design

C ASH FLOW FORECASTS Cash Flow Forecasts A record of all the cash flowing into and out of the business Shows opening balance at start of each month and closing balance at end Normally produced monthly but can be any time frame e.g. weekly Opening Balance Cash available at the start of the month Closing Balance Cash available at the end of the month If the closing balance at the end of January is £1500 what is the opening balance for February?

C ASH FLOW STATEMENTS Net Cash Flow The difference between total cash in and total cash out Total cash in = £2000, Total cash out = £1400, Net Cash Flow = £600 i.e. £600 more flowed in than out Quick recap before moving on Do you understand the following terms? Cash inReceipt Cash outPayments Credit SalesCredit Purchases Opening BalanceClosing Balance Net Cash Flow Cash Flow Forecast

C ASH FLOW FORECAST Jan (£)Feb (£)Mar (£)Apr (£) Total Receipts Total Payments Net cash flow Opening Balance Closing Balance A cash flow forecast for the first 4 months of Geoffrey’s farm shop. Can you explain the following figures? Why is his opening balance £0 in January? Why might cash out be so high in January? Why might cash in be lower in January than other months?

C ASH FLOW FORECAST Jan (£)Feb (£)Mar (£)Apr (£) Total Receipts Total Payments Net cash flow Opening Balance Closing Balance A cash flow forecast for the first 4 months of Geoffrey’s farm shop. Can you explain the following figures? Why is his closing balance negative in January? Why might having a negative closing balance be a problem?

Q UESTION TIME 11 MARKS May (£)June (£)July (£)Aug (£) Total Receipts Total Payments Net cash flow Opening Balance 750 Closing Balance A cash flow forecast for the next 4 months of Geoffrey’s farm shop. Geoffrey has asked you to help him complete his cash flow forecast.

C ASH In business a common quote is “Cash is king” Businesses need cash to survive Spending on credit is often more expensive Understanding the importance of cash and the dangers of spending on credit is important in life as well as business. What are the costs associated with spending on credit?

C ASH FLOW The flow of cash in and out of the business What are the dangers of having a negative closing balance? Think about how a business uses cash (its expenses) The timing of cash flow is important – a business that has cash flowing out too quickly, and in too slowly, may struggle to survive Your friends ask you to go to the cinema on Friday night. The bus will cost you £1.50 and a cinema ticket £5.50. You only have £2.00 until you get paid on Saturday. Can you go to the cinema?

C ASH FLOW Cash flow is important to continue day to day activities as well as plan for future success Invest in research and development of new products Buy new, up to date, equipment Spend on promoting the business for future growth Keep stock levels high enough to meet demand In order to survive a business must meet day to day expenditure

T HE IMPORTANCE OF CASH FLOW FORECASTS Cash Flow Forecasts Businesses normally produce a forecast of their expected cash flow before the start of the year This allows them to spot any potential cash shortfalls in advance They can then look to avoid this They can then make plans for this i.e. a prearranged overdraft Can monitor actual cash flow against predicted An unusual solution to cash flow problems!

T HE IMPORTANCE OF CASH FLOW FORECASTS Identifies negative closing balance If you are aware of this you can try and act Reduce or speed up cash outflows Increase or slow down cash outflows Identifies positive closing balance Is too much cash sat dormant when it could be used to grow the business or earn a higher rate of interest Can help set targets for future years Monitor actual cash flow against forecast Its not as easy as it sounds! If you were a business with a high closing balance at the end of each month what would you do with it?

C ASH FLOW BusinessRankingJustification Fruit stall on market Christmas tree grower Taxi company Second hand car lot PYO fruit farm Travel agent Window cleaner Look at the businesses listed below and consider how likely they are to have cash flow problems. Remember it is not about how much profit the business may or may not make but whether they will have enough cash on a day to day basis to meet expenses. Place these businesses in a rank order - 1 being most likely to have cash flow problems and 7 least. Justify your ranking.

R ISKS OF NOT COMPLETING A CASH FLOW FORECAST A business can not accurately plan its finances Payments to be made may be forgotten Payments to be received may be forgotten Cannot plan for any cash shortages e.g. arrange an overdraft in advance May not be able to meet day-to-day expenses as unaware of negative balances Difficult to set payment terms for customers and negotiate with suppliers

C ASH FLOW Bridget and Brendan run a small B&B in Brighton. During the summer months business is booming but earlier in the year Bridget struggles to make ends meet. She has bills to pay and a mortgage on the B&B but is lucky to have one or two paying customers per week. Brendan tells her not to worry as bookings for the summer are being made fast and they look likely to be fully booked from May right through to September. Bridget is worried this may be too late and tells Brendan “it is right now that we have cash flow problems”. Question time 1.What is meant by the term ‘cash flow problem’?(2 marks) 2.Explain the cause of Bridget and Brendan’s cash flow problem. (4 marks) 3. Is Bridget right to be so concerned? Justify your answer. (4 marks)

S OLUTIONS TO CASH FLOW PROBLEMS If a business does have cash flow problems this can be serious and they may need to take corrective action By serious we mean very serious as businesses do fail as a result of cash flow problems What would happen if at the end of the week there was not enough cash to pay the workers, purchase new stock, fill the van with petrol etc? So it is important to look for solutions Can you think of any solutions?

S OLUTIONS TO CASH FLOW PROBLEMS Slow down money flowing out of the business Negotiate credit terms with suppliers e.g. buy now pay in 30 days Can you think of any possible problems with this? Reduce amount of money flowing out Can you reduce costs e.g. find a cheaper supplier Can you think of any possible problems with this? Speed up money flowing in Get customers to pay quicker or possibly in advance e.g. pay a deposit Can you think of any possible problems with this? Increase money flowing in Take out a loan? Attract more customers – but how? Can you think of any possible problems with this?

Q UESTION TIME 11 MARKS Syed is the owner of a barber shop. He has produced the following cash flow forecast for the first three months. Syed has forgotten to include £400 per month for staff wages. Using this information update the cash flow forecast for his barbers. Jan (£)Feb (£)Mar (£) Total receipts Total payments Net Cash flow Opening balance Closing balance

T OPIC B.2 B C ASH FLOW FORECASTING You have now completed this topic, are you able to? Explain the purpose of a cash flow forecast Identify inflows and outflows Understand the sources of inflows Understand the destinations of outflows Identify the impact of timings of inflows and outflows Understand the benefits of using cash flow in planning Complete a cash flow forecast from given information Analyse a business’ finances based on cash flow and identify possible issues for a business from any cash surplus or deficit Try the test yourself quiz number 4