Cash flow - Business Case Studies

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Cash flow
THE TIMES 100
What is cash?
Cash is notes, coins and bank deposits that
provide firms with the spending power to
pay their bills and expenses
THE TIMES 100
Cash flow
Cash flow refers to the flows of cash
both into and out of a business
 Cash inflows are payments into a firm
from customers or other sources
 Cash outflows refer to payments made
by a business
 Net cash flow=cash inflow–cash outflow

THE TIMES 100
Cash flow forecasting
Cash inflows result from:
 Cash sales from customers
 Payments from debtors
 Cash from other sources such as bank
loans
Cash outflows result from:
 Paying overheads such as rent & wages
 Paying for raw materials & other variable
costs
THE TIMES 100
Cash flow forecasting
A cash flow forecast will include:
 Cash inflows (receipts)
 Cash outflows (payments)
 Net cash flow (inflows minus outflows)
 Opening balance (this is the same as
the closing balance of the previous
period)
 Closing balance (opening balance
combined with net cash flow)
THE TIMES 100
Cash flow forecasting
Jan
Feb
March
April
May
June
Cash
inflows
£17,000
£18,500
£19,000
£19,800
£21,000
£18,900
Cash
outflows
£14,300
£15,100
£24,900
£16,300
£17,800
£24,800
Net cash
flow
£2,700
£3,400 (£5,900)
£3,500
£3,200 (£5,900)
Opening
balance
£2,200
£4,900
£8,300
£2,400
£5,900
£9,100
Closing
balance
£4,900
£8,300
£2,400
£5,900
£9,100
£3,200
THE TIMES 100
Importance of cash flow
forecasting

To identify periods of cash shortfall so
action can be taken to deal with this

To identify periods of cash surplus so
expenditure can be planned

To secure additional funding, for example,
from a bank
THE TIMES 100
Consequences of cash flow
problems
If a firm does not have the cash to pay its
debts:
 Relationships with suppliers may
deteriorate
 Workers may leave
 It may have to cease trading
In the short-term CASH is considered to be
more important than PROFIT
THE TIMES 100
Causes of cash flow problems






Poor planning
External factors e.g. the credit crunch
Inadequate credit control
Holding excessive stock
Investing too heavily in fixed assets
Overtrading – expanding quicker than
available funds allow
THE TIMES 100
Improving cash flow
In simple terms, cash flow can be improved
by:

Increasing, or speeding up, cash inflows

Decreasing, or slowing down, cash
outflows
THE TIMES 100
Methods of improving cash flow
Increase & speed up cash
inflows
Decrease & slow down cash
outflows
Overdraft or bank loan
Delay paying creditors
Debt factoring
Delay unnecessary capital
spending
Sale of assets or ‘sale &
leaseback’
Lease rather than buy
Shorten credit terms for
customers & chase up debts
Reduce spending on expenses
e.g. negotiate lower rent
THE TIMES 100
Cash v profit
Do not confuse cash and profit
The receipt of cash may not coincide with
an associated sale, for example:
 An item may be bought on credit and paid
for at a later date
 A bank loan may be taken out causing a
positive cash flow, but no sales have been
made
THE TIMES 100
Cash flow in context
THE TIMES 100
Fill the gaps
Cash inflow
Cash outflow
Net cash flow
Opening balance
Closing balance
January February March
£10,000 £11,000
?
£9,000 £11,500 £10,800
£1,000
?
£400
?
£1,600
£1,100
£1,600
£1,100
£1,500
What are the missing figures?
Use the CIMA case study to help you
THE TIMES 100
Controlling cash
Management accountants deal with a range
of issues related to controlling cash in
organisations. Give examples of these
activities.
Use the CIMA case study to help you
THE TIMES 100
Managing cash shortfalls
Trained management accountants will
forecast when there may be possible cash
shortfalls and have strategies in place to
deal with these. What might a business do
if a possible shortfall has been forecast, to
ensure it can pay its creditors?
Use the case study to help you.
THE TIMES 100
Effective forecasting
Organisations operate within dynamic
business environments so management
accountants must take a range of external
factors into account when forecasting
cash flow. Give examples of changes that
may affect cash flow forecasts.
Use the CIMA case study to help.
THE TIMES 100
Useful resources
Cash flow lesson suggestions and
activities (The Times 100)
 CIMA case study (The Times 100)
 CIMA website

THE TIMES 100
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