Aims for today
• Explore what is meant by the term ‘Cash flow’
• Discuss the role and importance of cash in a
business
• Recognise the difference between a cash flow
forecast and a cash flow statement
• Appreciate how careful planning can minimise risk
Cash and cash flow
• Cash is vital to a businesses success and
includes notes, coins and money in the bank.
Cash flow is:
The flow of money into and out of a
business
Cash inflows
Cash Inflows are the cash coming into a business
Cash from the
individual
Loan from the
bank
Cash from
sales
Cash outflows
Cash outflows is the cash going out of a business
(the payments it makes to others)
Wages & training
Telephone, gas,
electric & other bills
Equipment &
Stock
Interest
on loans
Advertising
Maintenance
& repairs
Cash flow example
Think about Nestles new Milkybar
Moments... yummmmmmm...
• In your groups, make a list of the
all the cash inflows and cash
outflows that Nestle may have.
•Best answers MAY get a taster...
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.
The importance of cash
• Why is cash important in a business?
• Cash flow is essential to prevent a business
becoming INSOLVENT.
Insolvency is when a business can no longer
pay its debts.
Can you think of any recent examples?
Companies that no longer exist...
1. MFI
2. Royal Doulton (Waterford Wedgewood)
3. Zavvi Entertainment
4. HBOS Bank– but rescued by government
5. Adams (children's clothing retailers)
6. Barratts and Priceless (shoe shop chain)
Companies that no longer exist...
7. Viyella (clothing business)
8. Passion for Perfume (retail
chain)
9. Land of Leather (furniture)
10. Newcastle Productions
(distributor of Findus foods)
11. Blooming Marvellous,
(maternity-wear retailer)
12. XL Airlines
And of course...Woolworths
Joes Bar – Debt Management
http://clipbank/espresso/c
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=setresource&template=vi
d&databaseType=cms&res
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deID=542
3 mins
Cash Flow Forecasts
• The cash flow forecast allows businesses to plan
their finances. It is a prediction of the money that
will come into and out of the business.
They use them to:
1. See how well they should be performing
2. To see if action needs to be taken to avoid a cash
crisis
3. Help them apply for/secure loans from the bank
Over optimistic forecasting
• Businesses are sometimes over optimistic
when forecasting their cash flow. What impact
could this have?
• Essentially, they could end up spending
money they don’t have because they think
they will make it back in the future (according
to their forecast). Forecasts need to be done
CAUTIOUSLY.
Cash flow forecast for Floral Events
The OPENING BALANCE is: The cash balance at the
start of the month
The NET CASH FLOW is added to the opening
balance to get the CLOSING BALANCE.
The CLOSING BALANCE will become the opening
balance for the next month
Lets look at the example...
Floral Events
£
Receipts
January
February
March
April
May
June
2,400
2,400
3,000
3,400
4,500
5,00
Payments 2,200
2,500
3,400
4,000
4,200
4,200
Net cash
flow
200
-100
-400
-600
300
800
Opening
balance
0
200
100
-300
-900
-600
Closing
Balance
200
100
-300
-900
-600
200
Cumulative cash flow
The CLOSING BALANCE shows the CUMULATIVE
CASH FLOW
Cumulative cash is the build up of cash in a firms
bank account
Task
• Look at the Floral Events
Case study p77.
• Does the company have
a cash flow problem?
• If so, what action can
Holly take to overcome
this?
Cash flow problems
What affects cash flow?
Factors affecting cash flow
Sales
Stock
levels
Factors
affecting
cash flow
Credit
terms
Costs
Factors affecting cash flow
• Sales can change
• Costs can change
• Credit terms can change
• Stock levels can change
Negative cash flow
• In the case study, Floral Events had NEGATIVE
CASH FLOWS in March, April and May.
• Negative cash flow is also known as being ‘IN
THE RED’. It happens when a businesses
OUTFLOWS are greater than its INFLOWS.
Cash Flow Exercise
The table on the next slide shows a cash forecast
for a new nightclub started with £250,000 of
CAPITAL. The forecast is based on some key points:
• Building work will be finished by September so
customers can come in October.
• A launch party will bring the customers and
publicity needed for success.
• Costs will be as predicted so the company will not
have to dip into their OVERDRAFT facility.
Club Woo Woo
Figures in
£0000’s
Aug
Sept
Oct
Nov
Dec
Jan
Cash at start
250
65
10
20
25
55
0
0
85
65
115
55
185
55
75
60
85
60
Net monthly
cash
(185)
(55)
10
5
30
(5)
Cumulative
cash
65
10
20
25
55
50
Cash in
Cash out
Answer the questions
1. Give 2 benefits of cash flow forecasting for a new,
small firm. (2)
2. Using the table;
(a) explain briefly 2 reasons why the firms cash flow
has fallen from £250,000 in August to £10,000 by
September. (4)
(b) Explain the likely effect on the firms cash position if
the building work was not completed until
November. (4)
The importance of planning
• Planning will help businesses to avoid cash flow problems. A strategy to
avoid problems is GET IT
• Get the help/support of banks/investors
• E – Ensure market research is thorough
• T –Thoughtful cash flow planning will help
• I – investigate where you get help spreading payments
more evenly
• T – Track the ACTUAL cash flow against the FORECAST
Now for a game...
Cash flow drag & drop and cash flow model
http://www.businessstudiesonline.co.uk/live/index.php?option=com_content
&view=article&id=2:edexcelgcse-activities&catid=3:gcse-businessactivities&Itemid=5
Homework – Due Thurs 3rd Dec
1. Answer ALL the questions on page 79
2. Pocketbook Revision: pages 51-54 & 56-58
Mr Elephante says
“Don’t forget to remember to:
•Use FULL sentences
•Use FULL STOPS at the end of your sentences
• Use CAPITAL letters at the beginning of sentences and for
the names of people & places.
• Date and title your homework
Topic 1.3
Chapter 16
The
Business
Plan
Page 80-81
The Business Plan
• A business plan is a detailed development plan
for a business. It includes information about the
company’s:
•
•
•
•
•
•
•
•
Location
Ownership
Products/services
Resources
Production methods
Marketing
Financial details
It is usually completed on a 2-5 year basis
Group Task
• In your groups decide on a company that you will
start up.
• Using the example, draw up a business plan and
include a cash flow forecast.
• Next week you will deliver a presentation to a
very important panel (the bankers, who will
decide whether or not to give you a loan).
• You must be able to justify your business plan
details, decisions and forecasts. You should dress
appropriately.
The Business Plan
The plan must include:
Section 1: The business idea
Section 2: Resources and quality
issues
Section 3: Financial resources
Section 4: Feasibility and
evaluation
Quick Quiz
• What is the opening balance?
• What is the closing balance?
• What does the Net cash flow mean?
• What is the cumulative cash flow?