View
218
Download
0
Category
Preview:
Citation preview
7/31/2019 Budget and Budgetting 1(2)
1/24
7/31/2019 Budget and Budgetting 1(2)
2/24
Cash
It is essential to sustain a business.
It is important for trading purposes, buy stock,
pay workers salaries, bills etc
Profitable business can fail due to lack of cash.
It is also possible for business trade for many
years without making any profit.
7/31/2019 Budget and Budgetting 1(2)
3/24
Harriet sets up a specialist mountain bikebusiness. She rents a shop for $1,000/- amonth- the first payment is due one month
after taking up the lease. She buys 10 bikes onone months credit. Each bike cost $1,000/-and is sold for $1,300/-. She sells all the bikeswithin the first 2 weeks, generating income of$13,000/- (and an initial profit of $3,000/-)
Cash= ? Profit=? Stock=?
7/31/2019 Budget and Budgetting 1(2)
4/24
Towards the end of the 1stmonth she uses the$3,000/- profit to buy 3 more bikes, hoping tosell them quickly. Unfortunately, a competitor
reduces its prices and Harriet finds that shecannot sell her bikes
Cash = ?
Profit = ?
Stock = ?
7/31/2019 Budget and Budgetting 1(2)
5/24
At the end of the month, Harriet is faced with 2 bills.She pays her supplier $10,000/- but no longer hasthe cash to pay her landlord.
Cash=? Profit=? Stock=?
She has still (on paper) made $3,000/- profit. Thisprofit is tied up in stock (the bikes) that she cannot
sell. Unless the landlord is generous or she can findthe rental money from elsewhere, then despite beingprofitable, Harriet has a cash flow crisis on herhands.
7/31/2019 Budget and Budgetting 1(2)
6/24
Cash flow statement
A summary of the cash that has come into and out of the business over a period of
time, showing:
Where cash has come from (cash receipts)
How it has been used (cash payments)
Details what has happened, rather than what might happen in the future. Limitedcompanies are required to publish cash flow statements with their annual accounts.
It also include information about investing & financing activities of a company over a
period of time.
Helps users of financial statements evaluate a companys ability to have sufficient
cash- both on a short run and on a long run basis. The statement of cash flows is
useful to virtually everyone interested in the companys financial health: short-and
long-term creditors, investors, management- and both current and prospective
competitors
7/31/2019 Budget and Budgetting 1(2)
7/24
ALLISON CORPORATION
Statement of Cash Flow
For the year ended December 31, 2005
Cash flows from operating activities:
Cash received from customers $870,000
Interest and dividends received $ 10,000
Cash provided by operating activities $880,000
Cash paid to suppliers and employees $(764,000)
Interest paid $ (28,000)Income taxes paid $ (38,000)
Cash disbursed for operating activities $(830,000)
Net cash flows from operating activities $ 50,000
Cash flows from investing activities:
Purchases of marketable securities $(65,000)Proceeds from sales of marketable securities $ 40,000
Loans made to borrowers $(17,000)
Collections on loans $ 12,000
Purchases of plants assets $(160,000)
Proceeds from sales of plant assets $ 75,000
Net cash flows from investing activities $(115,000)
7/31/2019 Budget and Budgetting 1(2)
8/24
Cash flows from financing activities:
Proceeds from short-term borrowing $ 45,000
Payments to settle short-term debts $(55,000)
Proceeds from issuing bonds payable $100,000
Proceeds from issuing capital stock $ 50,000
Dividends paid $ (40,000)
Net cash flows from financing activities $100,000
Net increase (decreases) in cash $ 35,000
Cash and cash equivalents, Jan. 1 $ 20,000
Cash and cash equivalents, Dec 31 $ 55,000
7/31/2019 Budget and Budgetting 1(2)
9/24
The cash flows shown in the statement are grouped into 3 major
categories:
1) Operating activities
2) Investing activities
3) Financing activities
Operating activities
The operating activities section shows the cash effects of revenue and
expense transactions.
The operating activities section of the statement of cash flows include thecash effects of those transactions reported in the income statement.
Receipts and payments of interest are classified as operating activities.
7/31/2019 Budget and Budgetting 1(2)
10/24
Cash flows from operating activities include:
Cash receipt Cash payments
Collections from customers for Payments to suppliers of
sales of goods and services merchandise and services, including
payments to employeesInterest and dividends received
Payments of interest
Other receipts from operations;
i.e: proceeds from settlement of Payments of income taxes
litigation
Other expenditures relating to
operations; i.e: payments in
settlement of litigation
7/31/2019 Budget and Budgetting 1(2)
11/24
Investing Activities
Cash flows relating to investing activities present the cash effects oftransactions involving plant assets, intangible assets, and investment. They
include:
Cash receipts Cash payments
Cash proceeds from selling Payments to acquire investments
Investments and plant assets and plant assets
Cash proceeds from collecting Amounts advanced to borrowers
principal amounts on loans
7/31/2019 Budget and Budgetting 1(2)
12/24
Financing activities
Cash flows classified as financing activities include the following items thatresult from debt and equity financing transactions:
Cash receipts Cash payments
Proceeds from both short- Repayment of amounts borrowedterm and long-term borrowing (excluding interest payments)-
Refer to repayment of loans
Cash received from owners Payments to owners, such as cash
(i.e: from issuing stock) dividends
7/31/2019 Budget and Budgetting 1(2)
13/24
Cash and Cash Equivalents
Cash is defined as including both cash and cash equivalents.
Cash Equivalents: Short-term, highly liquid investments, such as moneymarket funds, commercial paper, and treasury bills.
Preparing cash flow statement.
It is easier to prepare by examining income statement and the changesduring the period in all of the balance sheet accounts except for cash.
7/31/2019 Budget and Budgetting 1(2)
14/24
Cash Flow forecast
A way of constantly monitoring cash flow position. A plan of the expected
movements of cash into and out of the business in the year ahead.
Allowing managers to:
Ensure enough cash is available to meet outgoings
Plan how to finance any anticipated shortages of cash
Cash flow forecast list:
Cash inflows
(Money coming in from sales and other source)
Cash outflows
(money being used to pay bills and other expenses)
Net cash flow
The effect on net cash flow (inflow-outflow) on the businesss cash balances
7/31/2019 Budget and Budgetting 1(2)
15/24
SEPT OCT NOV DEC JAN FEB TOTAL
Cash inflows
Sales Revenue 1500 1600 1750 2000 1500 1100 9450
Total cash in 1500 1600 1750 2000 1500 1100 9450
Cash outflows
Water - - 100 - - 100 200
Electricity - - 100 - - 100 200
Raw Materials 750 800 875 1000 750 550 4725
Wages 100 100 100 200 100 100 700
Advertising - 50 500 1000 - - 1550
Maintenance - - 30 50 10 10 100
Office Equipment 50 - 100 - - - 150
Premises rent 250 250 250 250 250 250 1500
Misc. expenses 10 10 100 200 10 10 340
Total cash out 1160 1210 2155 2700 1120 1120 9465
Net cash flow (+/-) 340 390 (405) (700) 380 (20) (15)
Opening balance 0 340 730 325 (375) 5 -
Closing balance 340 730 325 (375) 5 (15) -
7/31/2019 Budget and Budgetting 1(2)
16/24
May June July
Cash inflows
Start-up capital 5,000
Sales revenue 1,000 ?
Total Receipts ? 1,000 1,200
Cash outflows
Payments
Insurance 100 100 100
Stock purchases 0 650 780
Miscellaneous 50 50 50
Rent 1,000 1,000 1,000Electricity 100
Telephone 75
Marketing costs 20 24
Shop fittings ?
Water 150
Total payments 3,150 ? 2,279
Total receipts 5,000 1,000 1,200
Total payments 3,150 ? 2,279
Net cash flow ? ? ?
Opening balance 1,850 1,030
Closing balance 1,850 ? ?
7/31/2019 Budget and Budgetting 1(2)
17/24
Using the figures provided, complete 12-month cash flow forecast for Wolf Clothing Stores.
Note: The first month will be a non-trading month (no-sales will be made, but all other
relevant costs will still be incurred).
Capital introduced: $15,000/- is invested in the business by the owners.
Sales : Sales are estimated at $1,000/- in the first month , increasing by 35%
each month thereafter.
Insurance : $1,200/- is paid in equal instalments.Stock : Cost of purchase is 65% of sales. Loyalty discounts after 6 months will
reduce this to 55% (i.e: from the 7th trading month)
Miscellaneous : $25/- per month
Rent : $1,000/- per month. The lat above the shop is rented out bringing in
$450 per month additional income.
Accountants Fee : $1,000/- annual fee, paid in first month .
Electricity : $100/- per quarter (July, October, January, April)
Telephone : $75/- per quarter (July, October, January, April)
Vehicle costs : $200/- in the 1stmonth, $75/- per month thereafter.
7/31/2019 Budget and Budgetting 1(2)
18/24
Marketing costs : 2% of sales for 1st6 month increasing to 6% from the 7th trading month
Water : $100 per quarter (July, October, January, April)
Salaries : Since Wolf are operating as a partnership, they do not intend to pay
themselves for the 1st3 months . After this time, salaries will be equal
7% of sales.
Shopfittings : $2,000/- in the 1stmonth
7/31/2019 Budget and Budgetting 1(2)
19/24
USEFULNESS LIMITATIONS
Cash flow forecasts enable businesses toidentify cash shortages. If a business identifies acash shortage, it can plan to avoid or manage
situation.
Cash flow forecasts are only estimates. Salesmay be lower than forecast or cost may behigher. A wide range of factors will affect the
accuracy of the forecast.
Banks require cash flow forecasts to beprepared before they grant a business loan. Thisensures that the business will be able to payback the loan and that it understands the
importance of cash flow management.
It is impossible to forecast every item ofexpenditure.
Using a cash flow forecasts, a business can planexpenditure based on a future cash surplus, ordelay expenditure to avoid a cash shortage.
The cash flow statement may reveal a problembut may give little indication of the underlyingcauses (although, at least, management will beaware of the problem)
By completing a cash flow forecast , using aspreadsheet, the business can consider whatifs. The spreadsheet will automatically work outthe cash implications of, for instance, offeringcustomer longer credit period.
Management must use cash flow forecasts as aworking tool. Once a cash flow forecasts hasbeen prepared, it should be monitored regularlyand updated to take into account changingeconomic circumstances.
7/31/2019 Budget and Budgetting 1(2)
20/24
Cash forms a large part of working capital.
Working Capital:
Amount of money available to fund the day-to-dayrunning of a business.
It is calculated by comparing what a business ownswith what it owes.
Working Capital= Current Assets- Current Liabilities
7/31/2019 Budget and Budgetting 1(2)
21/24
A business needs to have more currentassets than current liabilities to ensure thatits short-term debts can be meet.
A lack of working capital causes the sameproblems as lack of cash (remembering thatcash is just one part of working capital). A
business will be unable to meet its short-term debts (i.e: paying for stock, or payingstaff) and will face financial crisis.
7/31/2019 Budget and Budgetting 1(2)
22/24
Investing too much in fixed asset
Holding to much stock
Overtrading Seasonal fluctuations
Giving too much credit
Using too much credit Unexpected events
7/31/2019 Budget and Budgetting 1(2)
23/24
Chase debtors Cut cash outflow
Debt factoring
Delay payments Increase cash flow
Overdraft
Bank Loan
Sale and leaseback
Sell unused assets
7/31/2019 Budget and Budgetting 1(2)
24/24
Williams, J.R, Haka S.F, Bettner, M.S &Carcellon, J. V.2008. Financial&ManagerialAccounting
Thompson, R. and Machin, D. (2003). AsBusiness Studies
Recommended