Topic 3
Effective Financial Management
Improving cash flow
Pages 66-69
To appreciate the purpose of consumer
protection laws & apply them to business
Aims for today
• To understand the main
aspects of financial
management as a means of
managing cash flow more
effectively.
• To analyse ways of increasing
cash inflows and reducing
cash outflows
To appreciate the purpose of consumer
protection laws & apply them to business
Cash and cash flow
• Cash is vital to a business’s success and
includes notes, coins and money in the bank.
Cash flow is:
The flow of money coming into and
going out of a business
Cash inflows
Cash Inflows: the cash coming into a business
Cash from the
individual
Loan from the
bank
Cash payments
from sales
Cash outflows
Cash going out of a business
Wages & training
Telephone, gas,
electric & other bills
Equipment &
Stock
Interest
on loans
Advertising
Maintenance
& repairs
Net cash Flow
• Net cash flow is the money left over when a
business takes its outflows from its inflows.
• In other words, NET CASH FLOW IS:
the receipts of a business minus its payments
Example: If Nestle have £30,000 per month coming
in and pay out £10,000 in costs, their NET CASH
FLOW is £20,000.
Task 1: Cash flow
Costa Coffee
In pairs, list the cash inflows and cash outflows
that Costa Coffee may have
Costa Coffee: Some ideas
•
•
•
•
•
Cash inflows
Payments from customer
Interest on bank accounts,
savings & investments
Franchise fees, royalty
payments etc
Merchandise
Receipt of bank
loans/overdrafts
•
•
•
•
•
•
•
Cash outflows
Purchase of stock, raw
materials or tools.
Wages, rents and daily
operating expenses.
Purchase of fixed assets PCs, machinery, office
furniture, etc.
Loan repayments.
Dividend payments.
Income tax, corporation tax,
VAT and other taxes.
Reduced overdraft facilities.
Financial Management
‘Deliberately changing monetary values
like cash flows to achieve financial
objectives’
Increasing cash inflows
Increasing
sales
revenue
Long term
solutions
Cash flow
e.g. loans
Improving
C.F from
customers
De-stocking
Increasing sales revenue
• Sales revenue = Selling price x quantity sold
Main ways to boost sales revenue:
1. Improved marketing: Using alternative or
additional forms of advertising or product trials
2. Better products: Introducing new or
differentiated products to the marketplace
De-stocking
• Reducing stocks of finished products (possibly
having a sale to shift stock surpluses).
Improving cash flow from customers
1. Reduce trade credit
2. Chase up late payments
3. Employ a factor
(A Factor is a financial company, often a bank that will
advance the money owed to a business by its customers)
What longer term solutions are there to
improving cash flow?
Solutions: Bank loan, issue shares (PLC’s) or sale of
assets.
Changing cash outflows
Reduce your
orders for
materials &
stock
Lease rather
than buy
Delay paying
invoices
Improve
& reduce
outflows
Business Mastermind
A business takes out a loan from a bank
repayable over four years. This will lead to an
immediate large cash...
A
B
C
D
inflow and smaller cash outflows over a period of time
inflow and smaller cash inflows over a period of time
outflow and smaller cash inflows over a period of time
outflow and smaller cash outflows over a period of
time.
Answer A
Gaweda manufacture DVD player parts. Destocking both raw materials and finished
products occurs in February. Between February
and April, this is most likely to lead to:
A improved cash flow because more raw materials will
be ordered
B improved cash flow because fewer raw materials
will be ordered
C improved cash flow because fewer finished products
will be sold
D a deterioration in cash flow because more finished
products will be sold.
Answer B
Which one of the following is most likely to
lead to improved cash inflows for a
business?
A Increasing the amount of materials bought from
suppliers
B Increasing the level of stocks of raw materials held
by the business
C Reducing the length of time customers are given to
pay their invoices
D Reducing the amount of time taken by the business
to pay its suppliers
Answer C
Task 2:
Worksheet: Improving cash flow
Homework: Revision Questions
1.
2.
3.
4.
5.
What is meant by the term ‘financial management’?
What is the difference between a cash inflow and a cash outflow?
Give three examples of cash inflows to a business.
Explain the purpose of de-stocking.
Identify and explain one long term solution that might improve a
firm’s cash flow.
6. Outline three possible ways that cash flows out of a business.
7. What is meant by the term ‘factor’?
8. If a firm has a positive cash flow does this mean it is making a
profit?
9. How might changing the order levels of materials affect a business?
10. ‘Delaying the payment of invoices is good for the cash outflow.’
Explain what is meant by this and how it may affect a business.
Homework: Revision Questions
1.
2.
3.
4.
5.
What is meant by the term ‘financial management’?
What is the difference between a cash inflow and a cash outflow?
Give three examples of cash inflows to a business.
Explain the purpose of de-stocking.
Identify and explain one long term solution that might improve a
firm’s cash flow.
6. Outline three possible ways that cash flows out of a business.
7. What is meant by the term ‘factor’?
8. If a firm has a positive cash flow does this mean it is making a
profit?
9. How might changing the order levels of materials affect a business?
10. ‘Delaying the payment of invoices is good for the cash outflow.’
Explain what is meant by this and how it may affect a business.
Revision Q: Answers
1. Financial management is the deliberate action of changing monetary variables to achieve
financial objectives, such as improved cash flows.
2. A cash inflow is cash coming into a business. A cash outflow is cash moving out of a
business.
3. Any three from the following (receiving): sales revenue; interest received from savings;
returns on other investments; sale of assets; money paid by debtors; rental of land or
buildings; any other relevant answer.
4. One way a business can increase its cash inflow is to make a conscious decision to reduce
its stocks of finished products by selling them off, known as de-stocking. Often it takes the
form of a sale where the finished goods are offered at reduced prices to customers for a
limited period. This usually results in customers buying more and an increase in revenue.
5. One of the following: bank loans – taking out a loan from a bank o other similar institution
to inject capital into a business; issuing shares – selling shares in the business to investors in
return for capital; selling assets – selling machinery, buildings or land that is not needed; sale
and leaseback – selling machinery, buildings or land then leasing them back to raise a lump
sum.
6. Any three from the following (paying for): raw materials; wages and salaries; rent; interest
on loans; electricity or gas; VAT; corporation tax; any other relevant answer.
Revision Q: Answers
7. A factor is a financial company, such as a bank, that advances the money that a business is owed by
its customers immediately and charges a fee for its services. A firm can typically get up to 90% of the
value of invoices by using a factor.
8. Cash flow is not the same as profit. Cash flow is the amount of money flowing into and out of a
business over a given period of time whereas profit is the amount of money that is left over after the
total costs have been subtracted from total revenues over a given period of time (usually a year). It is
possible that businesses can have cash flow problems but still be a profitable venture. A positive cash
flow simply means more money has flowed into the business over a period of time than has flowed out.
It says nothing about overall costs and revenues, however.
9. The order levels that a business places add to the cash outflow. By changing the amounts that are
ordered the level of cash outflow can be directly affected. Reducing the levels ordered will clearly reduce
any cash outflow. Cutting order levels will, however, have an effect on the production quantities that a
firm enjoys. The fewer raw materials ordered will result in lower production quantities. Clearly this is a
strategy that can only be used if the sales levels are falling as well. There could be an argument that if a
firm is overproducing then this strategy could also be employed to bring production levels in line with
sales volumes, leading to efficient working practices such as Just-In-Time.
10. One way in which a business can improve its cash outflow is by delaying any payment on invoices
due. This is where a firm does not pay its invoices on time, for example after 30 days. The longer it can be
delayed the better the cash flow position as there will be less cash flowing out of the business.
It can, however, have a negative effect on the reputation of a firm as one that does not honour
agreements. This may result in offers of credit or discounts on orders from suppliers being withdrawn
which may have a significant effect on production and costs.