1. GCE PROFESSIONAL BUSINESS SERVICES
CASH FLOW

2. Learning Outcomes Students should be able to:
define the term cash flow
understand the distinction between cash flow and profit
understand the importance of cash flow forecasting for financial decision making
construct and complete a cash flow forecast, including receipts (cash inflows), payments (cash outflows) and opening and closing balances for a business
analyse a cash flow forecast
analyse the benefits and limitations of cash flow forecasting for a business

3. CASH FLOW - Definition
Is the money coming into and going out of a business over a period of time. Money comes in through sales, capital, finance and money goes through purchases, wages and overheads

4. CASH FLOW Distinction between cash and profit
Cash is all the money in the business, (eg coming in through sales revenues or paid out through overheads)
not all of this cash can be used in the calculation of profit, for example purchasing a non current asset will cause a reduction in cash, but will not impact on profit.
The calculation of profit:
also includes non-cash expenses (which are not therefore included in a cash flow forecast) such as bad debts written off and/or depreciation.
is subject to ‘accounting adjustments’ which mean that the profit/loss for the financial period may not necessarily be the same amount as the closing cash balance as at the end of the financial period.

5. IMPORTANCE OF CASH FLOW
Cash flow is important to a business in context of decision making since a business:
needs a supply of ready money
needs to pay essential debts immediately
Needs to maintain a good reputation with suppliers
Needs to reduce finance costs by avoiding overdrafts/loans
Needs to plan ahead for the future

6. IMPORTANCE OF CASH FLOW (Cont’d)
Supports decisions taken in context of the operational business plan
Allows owner to plan business expenditure
Facilitates spending decisions and reviews
Highlights amount of debt finance that could be repaid and prioritise related decisions
Facilitates correct decision making in context of resource allocation

7. CASH FLOW FORECAST CONSTRUCTION OF CASH FLOW FORECAST:
Normally comprised of following key elements:
Time period, amount, cash flow in/out, opening/clos. balances
Sample layout:
Month Jan (£) Feb (£) Mar (£)
Opening balance 10 (20) (20)
Add cash flows in
Less cash flows out (50) (50) (40)
Closing balance (20) (20) 40

8. CASH FLOW FORECAST Cash receipts Cash payments from customers
TYPICAL CASH FLOWS IN
TYPICAL CASH FLOWS OUT
Cash receipts
Cash payments from customers
Online payments from customers
Trade Receivable receipts
Interest received
Tax refunds
Cash payments
Non-current assets eg vehicles
Trade payables
Purchases
Expenses
Tax payments
Drawings (sole traders)
Dividends (companies)

9. PURPOSE OF A CASH FLOW FORECAST
Enables business managers to make key decisions in relation to setting business targets eg strategic planning
Shows management when the money is needed and how much managers can make decisions to ensure availability of funds
Preparation of cash flow forecast should support lending decisions when applying for a loan

10. ANALYSIS OF A CASH FLOW FORECAST
Cash flows change for the following reasons:
Lease instead of outright purchase of non-current assets eg buildings, equipment
Delaying the purchase of non-current assets eg vehicles
Shortening the average trade receivables collection period
Reduce Inventory Levels thus reduce cash tied up in this type of asset
Negotiation with suppliers to extend trade payables
Sale of assets, other sources of income stated

11. CASH FLOW FORECAST - BENEFITS
Facilitates improved planning and control of business activities – eg payment dates for expenses are known
Enables managers to forecast future cash flows more accurately – eg deficits can be avoided by postponing certain payments
Allows managers to anticipate ‘peaks’ and ‘troughs’ in the cash cycle and take corrective action – surpluses can be re-invested to generate additional income
Assists co-ordination between managers – eg agreement of an investment/project start date

12. CASH FLOW FORECAST - LIMITATIONS
Cash flow estimates and may not be entirely accurate – a cash deficit may occur if costs are underestimated
Cash Flow Forecasts are subject to inaccuracies as the data may change due to a number of external factors which are beyond the control of business managers, including: changes in economic conditions, changes in interest rates, seasonal fluctuations and global events – eg interest costs may increase by £10,000 causing a cash deficit
Forecasts only consider cash payments and receipts only – ignores non-cash expenses which reduces profits

13. Learning Check Can you: define the term cash flow
understand the distinction between cash flow and profit
understand the importance of cash flow forecasting for financial decision making
construct and complete a cash flow forecast, including receipts (cash inflows), payments (cash outflows) and opening and closing balances for a business
analyse a cash flow forecast
analyse the benefits and limitations of cash flow forecasting for a business