Cash Flow

ACCOUNTING& FINANCE

Cash Flow

Calculation and Interpretation of Cash Flow Forecast

Movement of money into and out of a business.

Importance of Cash Flow

Essential to short-term survival

Poor cash flow - most common reason for failure

Shows expected cash inflows and , cash outflows and estimated bank balance, usually on a month by month basis over a period of 6 to 12 months.

Cash Flow

Cash Flow Forecast

Calculation and Interpretation of Cash Flow Forecast

Importance of Cash

Cash versus Profit

Profit: difference between revenue and expenses.

Eg: Sales £120,000. Costs £85,000. Profit = £35,000.

Importance of Cash

Cash versus Profit

However: If part of profit still owed by customers, profit may not / never be realised as cash.

Also: Business may have more cash in bank than profit – may not yet have paid suppliers for services received.

Purpose

Cash might have to be borrowed.

Cash could be invested

Identify periods when:

Calculation and Interpretation of Cash Flow Forecast

Cash inflows. Cash outflows. Opening and closing bank

balance.

Three main sections:

Construction

Calculation and Interpretation of Cash Flow Forecast

Net cash flowdifference between inflows and outflows.

Construction

Calculation and Interpretation of Cash Flow Forecast

Not all goods / services are paid for immediately on receipt.

Customers often given credit - usually 30 to 70 days.

Timing of receipts / payments needs careful consideration.

Importance of Timing

Calculation and Interpretation of Cash Flow Forecast

Produce three-monthly cash flow forecast for business specialising in tailoring men’s suits, based on following:

Example

Calculation and Interpretation of Cash Flow Forecast

1. Opening balance - April - £2600.

2. Forecast sales April, May, June - £4000, £5200, £8000. One quarter – immediately in cash. Remainder – one month later. NB Credit sales for March - £2800.

Example

Calculation and Interpretation of Cash Flow Forecast

3. Material costs - £1200, £1400, £1800 respectively. One month’s credit from suppliers. NB Material purchases for March - £1200.

Example

Calculation and Interpretation of Cash Flow Forecast

4. Wages - £1200, £1500, £1700. Paid directly to bank accounts - end of month. Some also paid in cash.

Example

Calculation and Interpretation of Cash Flow Forecast

5. Plans to purchase £6000 machinery - start of April. Paid - immediately by cheque.

Example

Calculation and Interpretation of Cash Flow Forecast

6. Telephone – payablequarterly - £300 forecast.

Payable in June.

Example

Calculation and Interpretation of Cash Flow Forecast

7. Other expenses - £200 per month

Example

Calculation and Interpretation of Cash Flow Forecast

Apr May Jun A. Cash inflows Cash Sales 1000 Credit Sales Total cash inflow (A) Purchase of Materials Payment of Wages Purchase of Machinery Telephone Bill Other expenses Total cash outflows (B) C. Opening balance 2600 D. Net cash flow (A-B) E. Closing balance (C+D)

Problem in April & May - due to purchase of new machinery.

Example

Calculation and Interpretation of Cash Flow Forecast

Overdraft Credit Leasing

Options?

Example

Calculation and Interpretation of Cash Flow Forecast

Effective aid to decision making and control but…….depends upon accuracy of amounts and timings.

Perils

Calculation and Interpretation of Cash Flow Forecast

Many factors outside firm’s control – degree of flexibility required, particularly if new business.

Perils

Calculation and Interpretation of Cash Flow Forecast

Consider best / worst case scenarios.

Perils

Calculation and Interpretation of Cash Flow Forecast

Prepare for worst, eg sales lower than expected, bad debts, rise in material costs.

Perils

Calculation and Interpretation of Cash Flow Forecast