1. Cash
Flow

2. Cash Balances and Flows
BUSS2 Focus
Financial management
Measuring performance
Taking action to improve cash flow
Budget Variances
Profit Margins
Cash Balances and Flows

3. Why Does Cash Matter?

4. Profit is a matter of Opinion!
Thought for the Day (1)
Profit is a matter of Opinion!

5. …continued
Cash is a matter of Fact!

6. Revenue is Vanity Margin is Sanity Cash is King
Thought for the Day (2)
Revenue is Vanity
Margin is Sanity
Cash is King

7. An Important Distinction
Two Kinds of Cash Flow in Business
Trading Flows
Financing Flows
Cash sales & debtors
Suppliers & payroll
Stocks
Buying fixed assets
Leasing / hiring
Overheads
Tax
Bank interest
Bank loans (in & out)
Shares – investment & dividends
One-off asset deals

8. Trading Flows Right at the heart of managing a business
Close link to business profitability
Dictated by Industry norms (e.g. payment terms)
Plenty of scope for active cash flow management

9. Financing Flows Determined by choices made about sources of finance
Business is often at the mercy of outsiders – if it has debt
Much less scope for active management

10. What Really Matters in Cash Flow
Profitability – no hiding place
Customers – the problem of late payment
Suppliers – trading terms & relationships
Stocks – not too little, not too much
Financial structure
Needs to be appropriate
Match the asset to the right finance

11. Specification Red Herring
Factoring
Typically selling to other businesses
Typical turnover £250k- £5m
High cost: 5-10% loss of gross margin
Factoring company collects debts
Just 18,000 businesses use it in the UK: out of 4.5 million
Invoice financing is much bigger

12. Profit and Cash Flow Be careful!
Ways to Improve Cash Flow…
“Care needs to be taken here – the aim is to improve the cash position of the business, not sales revenue or profits”
Hodder AQA Business Textbook (2008)

13. Why Businesses Run Out of Cash
Lack of profit (viability of business)
Excess illiquid assets (too much working capital & production capacity)
Too much growth (overtrading)

14. Cash Flow Clue-DOH!

15. Your Task Answer questions to obtain clues Examine the evidence
Decide the three main reasons why Peston Plastics went bust

16. Five questions are in the sealed enveloped

17. Clues
You can choose up to five pieces of evidence – one for each question answered correctly

18. Your choices (max 5) 1 2 3 4 5 6 7 Balance sheet at 30 September 2008
Exhibit
Contains 1
Balance sheet at 30 September 2008 2
Profit & Loss Accounts for 2007 & 2008 (9 months) 3
Cash Flow Forecast for 2008 (7 months actual) 4
Memo from Ray Bodger (Finance Director) 5
Financial ratio analysis for Peston Plastics 6
Newspaper clippings for Peston Plastics 7
Comparison with key competitors

19. A C B D Q1 Short-term cash flow can be improved by
Extending the period of trade credit A C
Increasing overheads
Increasing the value of finished stocks B D
Repaying a bank loan

20. Q2
Which of the following is a possible symptom of "overtrading"?
A significant fall in liquidity ratios A C
A slowdown in turnover
An increase in stock turnover B D
A decrease in time taken to pay suppliers

21. Q3
Which one of these events might lead to a cash flow problem?
Major supplier expands into China
Govt cuts Corporation Tax rate A C
Cost savings achieved on a large contract
Customers ask for longer credit B D

22. Q4
Which of these defines the net working capital of a business?
Trade debtors less trade creditors
Cash balances less bank overdraft A C
Current assets less current liabilities
Fixed assets less depreciation B D

23. A C B D Q5 Cash flow could be improved by… Decreasing stock turnover
Better credit control over trade debtors A C
Reducing the gross profit margin B D
Accelerating capital projects

24. Evidence Gathering Cash Flow Clue-DOH! A: Low profits
Possible Causes of the Cash Flow Problem
Yes / No
Evidence
A: Low profits
B: Management of trade debtors
C: Management of stocks
D: Management of creditors
E: Overtrading
F: Seasonal demand
G: Unforeseen change
H: Over-investment in fixed assets
I: Bad luck
J: Credit crunch

25. Your Choice of the Three Reasons
Example Only
Reason 1
Reason 2
Reason 3 H D C

26. Your Choice of the Three Reasons

27. Does Your View Agree with the Receivers?
STRICTLY CONFIDENTIAL
Find Grabit & Sell
Results of the investigation into the financial affairs of
PESTON PLASTICS LIMITED
Company Registration:
IN RECEIVERSHIP

28. Exhibit 1 - Balance Sheet
2007
2008
£'m
Dec
Sept
FIXED ASSETS
Tangible fixed assets 68 95
CURRENT ASSETS
Trade debtors 48 55
Stocks 7 10
Cash balances 15
CURRENT LIABILITIES
Trade creditors 40 45
Bank overdraft 17
NET CURRENT ASSETS 30 3
Long-term liabilities 25
NET ASSETS 98 73
CAPITAL AND RESERVES
Share capital 2
Profit and loss 96 71

29. Exhibit 2 - Profit and Loss Account
2006
2007
2008
£'m
Actual
Forecast
Sales
190
175
150
Cost of Sales 72 75
Gross Profit
118
100 78
Wages & salaries 48 45 40
Other costs 47 43 39
Operating Profit 23 12 -1
Bank interest payable -6 -8
-10
Profit before tax 17 4
-11

30. Exhibit 3: Cash Flow Forecast - 2008
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
£'m
Actual
Forecast
Sales 8 10 13 15
Payments for stocks 3 5 6 7
Wages & salaries 4
Other costs 2
Payment for fixed assets 1
Bank loan repayment
Bank interest
Net cash flow -6
-13 -7 -2
Opening balance 9 -4
-10
-17
-15
-16
Closing balance

31. Exhibit 7 - Competitor Profiles
Peston Plastics
Declan Extrusions
Evan Industrial Plastics
JMR Plastic Extrusions
Financial ratios
Gross Profit Margin
52%
57%
56%
61%
Operating Profit Margin
-1% 8% 7% 9%
Current Ratio
1.0
1.7
1.9
Quick Ratio
0.9
1.5
Stock turnover 7 9 11
Debtor days
112
100 94 81
Financial Summary (amounts in £m)
Market share
1.2%
1.6%
2.0%
2.5%
Sales
150
195
254
315
Operating Profit -1 15 17 29
Fixed Assets 95 59
102
120
Stocks 10 12
Trade debtors 55 53 65 70
Cash balances
-17 19 6 45