Starter QUICK QUESTIONS Complete the following quick questions in your workbooks. Indicate how sure you are, using the following system I am sure this is correct I am not sure if this is correct This is a guess, I have no idea

Quick Questions 1. Define Total Costs 2. The formula to calculate total revenue is… 3. Give two ways a business can maximise profit 4. Define the Break-even point

CASH-FLOW FORECAST

Learning Objectives Learners will be able to define key terms relating to cash-flow forecasting Learners will be able to analyse the implications of long term negative net cash flow Learners will be able to create a cash flow forecast

What is cash flow? CASH FLOW – the movement of money into and out of a business bank account INFLOWS refers to money received by the business EXAMPLES: Sales revenue Capital Loans Grants OUTFLOWS refers to money paid out by the business EXAMPLES: Purchases Rent & Rates Wages & Salaries BUSINESS

Continued… The difference between the inflows and the outflows is called the net cash flow. Positive net cash flow – Inflows are greater than out flows Negative net cash flow – Inflows are not enough to cover out flows Cash Balance – the amount of money in a business’ account at any particular time

Continued… What will happen if a business’ net cash flow remains negative for some time? For this reason, businesses must use cash-flow forecasting to predict the cash balance at regular intervals so that action can be taken if a problem is foreseen.

Building a cash-flow forecast To build a cash-flow forecast you need to have the following information Opening Balance - the amount of money in the business’ bank account at the start of the period Income per Period – the amount of money expected to go into the bank account in that month Expenditure per Period – the amount of money expected to leave the bank account in that month Closing Balance – the amount expected to be in the bank account at the end of the period

Plenary Select the correct answer to each question and write the corresponding letter in your book Which of the following would not be a way of improving cash flow? a) Increasing the overdraft limit b) Chasing up debtors c) Upgrading equipment d) Destocking

Continued How is the “net cash flow figure” calculated? a) Opening balance + Cash inflows b) Cash outflows – Cash inflows c) Opening balance – Cash outflow d) Cash inflows – Cash outflows

Continued What is the net cash flow if the cash inflows for the month are £620 and the cash outflows are £1150? a) -£1770 b) -£530 c) £530 d) £1770

Continued What was the opening balance for May if the closing balance for the month was £9720 and the net cash flow in May was -£3645 a) £6075 b) £13365 c) £7290 d) -£6075

Continued Which of the following is not a problem associated with cash-flow forcasting? a) All figures are estimates b) Forecast does not allow for unexpected costs c) It is not used again once it has been created d) Costs can rise throughout the year

Answers Q1 – c) Upgrading equipment would increase cash outflows so cash flow would worsen Q2 – d) Q3 – b) Net cash flow = inflows – outflows = £620 - £1,150 = -£530 Q4 – b) Opening balance = closing balance – net cash flow = £9,720 – (-£3,645) = £13,365 Q5 – c)The cash flow forecast is used throughout the year to compare to the actual cash flow of the business