Cash flow
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What is cash?
Cash is notes, coins and bank deposits that
provide firms with the spending power to
pay their bills and expenses
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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

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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
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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)
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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
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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
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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
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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
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Improving cash flow
In simple terms, cash flow can be improved
by:

Increasing, or speeding up, cash inflows

Decreasing, or slowing down, cash
outflows
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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
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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
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Cash flow in context
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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
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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
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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.
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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.
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Useful resources
Cash flow lesson suggestions and
activities (The Times 100)
 CIMA case study (The Times 100)
 CIMA website

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