1. 3.3 Using Cash Flow 3 F INANCE 3.3 C ASH F LOW 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

2. 3.3 U SING C ASH F LOW  In this topic you will learn about  The meaning of simple cash flow statements  The importance of cash flow statements  Identifying solutions to cash flow problems 3.3 C ASH F LOW

3. 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 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 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? 3.3 C ASH F LOW

4. C ASH FLOW STATEMENTS  Cash flow  The movement of money in and out of a business  Cash in  Money that flows into the business  Receipts Cash sales Receipts from earlier credit sales  Cash out  Money that flows out of the business  Purchases Cash purchases Payments for earlier credit purchases 3.3 C ASH F LOW Can you explain what is meant by credit sales and credit purchases?

5. C ASH FLOW STATEMENTS  Cash Flow Statements  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 3.3 C ASH F LOW If the closing balance at the end of January is £1500 what is the opening balance for February?

6. 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 3.3 C ASH F LOW 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 Statement

7. C ASH FLOW STATEMENT Jan (£)Feb (£)Mar (£)Jun (£) Cash In (Receipts) 4000450055006500 Cash Out (Payments) 13000225020002500 Opening Balance 0-9000-6750-3250 Closing Balance - 9000-6750-3250750 3.3 C ASH F LOW A cash flow statement 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?

8. C ASH FLOW STATEMENT Jan (£)Feb (£)Mar (£)Jun (£) Cash In (Receipts) 4000450055006500 Cash Out (Payments) 13000225020002500 Opening Balance 0-9000-6750-3250 Closing Balance - 9000-6750-3250750 3.3 C ASH F LOW A cash flow statement 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? Recap 3.1 What is an overdraft? How might an overdraft help Geoffrey?

9. C ASH 3.3 C ASH F LOW 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?

10. T HE IMPORTANCE OF CASH FLOW STATEMENTS  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 pre arranged overdraft  Can monitor actual cash flow against predicted 3.3 C ASH F LOW An unusual solution to cash flow problems!

11. T HE IMPORTANCE OF CASH FLOW STATEMENTS  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 3.3 C ASH F LOW Its not as easy as it sounds! We look more at these options shortly If you were a business with a high closing balance at the end of each month what would you do with it?

12. C ASH FLOW BusinessRankingJustification Fruit stall on market Christmas tree grower Taxi company Second hand car lot PYO fruit farm Travel agent Window cleaner 3.3 C ASH F LOW 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.

13. C ASH FLOW 3.3 C ASH F LOW 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 ‘mortgage’?(2 marks) 2.What is meant by the term ‘cash flow problem’?(2 marks) 3.Explain the cause of Bridget and Brendan’s cash flow problem. (4 marks)

14. 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? 3.3 C ASH F LOW

15. 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? 3.3 C ASH F LOW

16. S OLUTIONS TO CASH FLOW PROBLEMS 3.3 C ASH F LOW Bridget sits down with Brendan and shows him her forecast closing balance for the next 3 months. He now understands how serious the situation has become and suggests they see the bank manager to arrange a bank loan. Brendan wants to think carefully first to see if there is anything they can do themselves to try and resolve the situation. Bridget suggests asking guests to pay a 50% deposit when booking the rooms and the remainder of the payment 1 week before arrival. Brendan is worried that this may put guests off coming. Question time 1 What is meant by the term ‘bank loan’? (2 marks) 2 What is meant by the term ‘closing balance’? (2 marks) 3 Explain how taking a deposit might help resolve their cash flow problem? (4 marks) 4 Recommend and justify an alternative approach to resolving their cash flow problems. (6 marks)

17. U NIT 3 F INANCE  You have now completed the second section of the course – Finance  During this time you will have learnt a lot of new terminology. It is a good idea to write down a glossary of key terms.  See how many technical terms you can think of under each heading  3.1 Finance and support for small business  3.2 Financial terms and simple calculations  3.3 Using cash flows  Use your notes to ensure you have a complete list and then write a short definition for each one 2 F INANCE