3 FINANCE

3.3 CASH FLOW

Here are some of the terms we will use in this presentation, can you work out what they are?

PRICE SET money coming into the business

MAN TYPES money going out of the business

ASCOT REF making predictions into the future

ABLE CAN what is left in the bank

3.3 USING CASH FLOW

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 CASH FLOW

COLIN’S CASH FLOW

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 CASH FLOW

CASH 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 purchases3.3 CASH FLOW

Can you explain what is meant by credit sales

and credit purchases?

CASH 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 CASH FLOW

If the closing balance at the end of January is £1500 what is the opening balance for February?

CASH 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 CASH FLOW

Quick recap before moving onDo you understand the following terms?

Cash in ReceiptCash out PaymentsCredit Sales Credit PurchasesOpening Balance Closing BalanceNet Cash Flow Cash Flow Statement

CASH FLOW STATEMENT

Jan (£) Feb (£) Mar (£) Jun (£)

Cash In(Receipts)

4000 4500 5500 6500

Cash Out(Payments)

13000 2250 2000 2500

Opening Balance

0 -9000 -6750 -3250

Closing Balance

- 9000 -6750 -3250 750

3.3 CASH FLOW

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?

CASH FLOW STATEMENT

Jan (£) Feb (£) Mar (£) Jun (£)

Cash In(Receipts)

4000 4500 5500 6500

Cash Out(Payments)

13000 2250 2000 2500

Opening Balance

0 -9000 -6750 -3250

Closing Balance

- 9000 -6750 -3250 750

3.3 CASH FLOW

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 3.1What is an overdraft?

How might an overdraft help Geoffrey?

CASH

3.3 CASH FLOW

In business a common quote is“Cash is King”

Businesses need cash to surviveSpending 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?

THE 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 CASH FLOWAn unusual solution to cash flow problems!

THE 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 forecast3.3 CASH FLOW

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?

CASH FLOW

Business Ranking Justification

Fruit stall on market

Christmas tree grower

Taxi company

Second hand car lot

PYO fruit farm

Travel agent

Window cleaner3.3 CASH FLOW

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.

CASH FLOW

3.3 CASH FLOW

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 time1.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)

SOLUTIONS 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 CASH FLOW

SOLUTIONS 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 CASH FLOW

SOLUTIONS TO CASH FLOW PROBLEMS

3.3 CASH FLOW

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 time1 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)

UNIT 3 FINANCE

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 FINANCE