Cash Flow Forecast Scenario
Computer Supercentre Ltd have asked you to help them draw up a Cash
Flow Forecast for their business for the next Sixth Months
Their expected sales are estimated to be: £50,000 in January, February,
May & June; £100,000 in March and £150,000 in April.
The owners plan to invest £20,000 and get a Bank Loan of £120,000 in
January.
The expected production costs are estimated to be: £10,000 in January,
February, May & June; £20,000 in March and £30,000 in April.
Wages and Salaries are estimated to be: £20,000 in the first two months
and £40,000 thereafter.
Gas and Electricity is expected to stay constant at £5,000 throughout the
period.
Admin costs are expected to stay constant at £2,000 throughout the
period.
The Marketing costs are expected to be £2,000 in January, February and
March; £5,000 in April and May and £10,000 in June.
Bank Loan repayments will be £5,000 each month, but will start in February.
Bank Loan interest will be £1,000 each month.
Equipment is expected to be purchased in February only at a cost of
£140,000.
Cash Flow Forecast for Computer Supercentre Ltd for Jan – June
(£000)
Key (to help)
MONEY IN
Sales
A
B
C
D = (A+B+C)
Capital from
Owners
Bank Loan
TOTAL
MONEY IN
JAN
FEB
MAR
APR
MAY
JUN
50
50
100
150
50
50
20
0
0
0
0
0
120
190
0
50
0
100
0
150
0
50
0
50
MONEY OUT
E
Production
Costs
F
Wages/Salaries
G
Gas and
Electricity
H
Admin costs
I
Marketing
J
Bank Loan
repayments
K
Bank Loan
interest
L
Equipment
M =
TOTAL
(E+F+G+H+I+J+K+L) MONEY OUT
N = (D-M)
O
P = (O+N)
NET CASH
FLOW
OPENING
BALANCE
CLOSING
BALANCE
0
Activity: Fill in the white spaces based on the above Cash Flow Forecast
PROFIT AND LOSS ACCOUNT FOR COMPUTER SUPERCENTRE LTD
FOR YEAR ENDING 31ST JUNE 2013
£
Sales Revenue
Less Cost of Sales
Opening Stock
20,000
90,000
Closing Stock
20,000
Gross Profit
Expenses
200,000
30,000
12,000
26,000
Loan interest
6,000
Depreciation
6,000
£
TOPIC F – FINANCE - REVISION NOTES
WHY IS FINANCE NEEDED?
• For start-up – to fund start-up costs e.g. the purchase of fixed assets.
• Cash Flow – to pay for the running costs of a business, e.g.
wages/salaries.
• Renewal – most machinery and equipment has a limited life expectancy
and will at some stage need replacing
• Expansion – finance is needed to fund the expansion of the business, e.g.
funds to set up an additional shop.
SOURCES OF FINANCE
• INTERNAL SOURCES OF FINANCE –
o Owner’s funds
o Additional partners
o Reinvested profits
o Share Capital
•
EXTERNAL SOURCES OF FINANCE o Bank Overdraft
o Bank Loans (e.g. mortgage)
o Hire Purchase
o Trade Credit
o Leasing or renting
o Government grants
COSTS
• START-UP COSTS
These have to be paid when setting up a new business (or when an
existing business decides to expand). Most of these costs will be paid out
before the business starts to trade. Examples include:
o Buying in machinery/equipment
o Shop fixtures and fittings
•
RUNNING COSTS
Once the business has started to trade, many costs will have to be paid
out at regular intervals to keep the business running. These can be split
into two categories:
•
FIXED COSTS – Those costs which do not vary if the business
produces more goods. Fixed costs still have to be paid even if output
is zero. Sometimes referred to as OVERHEADS. Examples include:
o Rent
o Interest on loans
o Salaries
o Insurance payments
•
VARIABLE COSTS – These costs change directly with output. If a
business increases its output of a good, its variable costs will rise.
Examples include:
o Raw materials
o Packaging
o Wages (can be both a fixed cost and a variable cost)
CASH FLOW STATEMENTS AND FORECASTS
A Cash Flow Forecast is an estimate of what might happen to cash flow. It is
prediction of cash flow in the future. A Cash Flow Statement is a record of
the cash inflows and outflows to a business in the past.
•
THE USE OF CASH FLOW FORECASTS
o Businesses use them to plan future strategy
o To seek loans from banks
•
IMPROVING CASH FLOW - A business which doesn’t have enough cash
has a LIQUIDITY PROBLEM. There are various ways a business can
improve its cash flow situation:
o Injection of cash from a source of finance, e.g. bank loan or
from a shareholder.
o Delay paying bills for as long as possible
o Lower costs – e.g. reduce stock levels.
Example Cash Flow Forecast (Solution to Revision Activity)
Cash Flow Forecast for Computer Supercentre Ltd for Jan – June
(£000)
JAN
FEB
MAR
APR
MAY
JUN
MONEY IN
Sales
50
50
100
150
50
50
Capital from Owners
20
0
0
0
0
0
Bank Loan
TOTAL MONEY IN
120
190
0
50
0
100
0
150
0
50
0
50
Production Costs
Wages/Salaries
Gas and Electricity
Admin costs
Marketing
Bank Loan repayments
Bank Loan interest
10
20
5
2
2
0
1
10
20
5
2
2
5
1
20
40
5
2
2
5
1
30
40
5
2
5
5
1
10
40
5
2
5
5
1
10
40
5
2
10
5
1
Equipment
TOTAL MONEY OUT
0
40
140
185
0
75
0
88
0
68
0
73
NET CASH FLOW
150
(135)
25
62
(18)
(23)
OPENING BALANCE
0
151
16
41
103
85
CLOSING BALANCE
150
16
41
103
85
61
MONEY OUT
TRADING, PROFIT AND LOSS ACCOUNTS
The purpose of the Trading, Profit and Loss account is to:
• Show whether a business has made a PROFIT or LOSS over a financial
year.
• Show how the profit or loss arose – e.g. categorising costs between “cost
of sales” and “expenses”.
A Profit and Loss account starts with the TRADING ACCOUNT and then
takes into account all the other expenses associated with the business.
(Source: Tutor2u.net)
Example Trading, Profit and Loss Account (Solution to Revision Activity)
A Trading, Profit and Loss Account for Computer Supercentre Ltd for
period ended 30.6.13
£
Sales Turnover
LESS Cost of Sales
Opening Stock
Purchases
Closing Stock
£
450,000
20,000
90,000
20,000
90,000
Gross Profit
Expenses
Wages/Salaries
Gas and Electricity
Admin costs
Marketing
Bank Loan interest
Depreciation
360,000
200,000
30,000
12,000
26,000
6,000
6,000
280,000
Net Profit
80,000
BREAK-EVEN
The BREAK-EVEN POINT is the level of sales where the total costs of
making the items equals the total revenue received from selling them. Above
this point, a profit may be achieved while below it a loss may be made.
CALCULATING BREAK-EVEN
The below calculations show the break-even point for Computer Supercentre
Ltd.
• BY TABLE
UNITS
TOTAL
VARIABLE
REVENUE(£) COSTS(£)
FIXED
COSTS(£)
TOTAL
COSTS(£)
PROFIT/LOSS
(£)
0
1
0
500
0
100
280,000
280,000
280,000
280,100
(280,000)
(279,600)
10
5,000
1,000
280,000
281,000
(276,000)
100
50,000
10,000
280,000
290,000
(240,000)
200
100,000
20,000
280,000
300,000
(200,000)
300
400
500
600
700
150,000
200,000
250,000
300,000
350,000
30,000
40,000
50,000
60,000
70,000
280,000
280,000
280,000
280,000
280,000
310,000
320,000
330,000
340,000
350,000
(160,000)
(120,000)
(80,000)
(40,000)
0
800
400,000
80,000
280,000
360,000
40,000
900
1000
450,000
500,000
90,000
100,000
280,000
280,000
370,000
380,000
80,000
120,00
•
BY CHART
•
BY FORMULA
Break-even point =
Fixed Costs
Price per unit - Variable cost per item
= 280,000 = 700 units
500 – 100
WHY IS IT IMPORTANT FOR A BUSINESS TO KNOW THE BREAKEVEN POINT?
• To show a business how much has to be sold, over a certain period of
time, for its costs to equal its revenue
• This point will show a business when it could start to make a profit and it
will be an important target for new businesses.
• Helps a business to spot problems, such as:
o If its fixed costs are too high
o If its variable costs are too high
o If its revenue is too low
• Spotting these problems can help businesses to take action to put them
right, e.g. changing prices, cutting costs, or increasing sales.
BALANCE SHEETS
Balance sheets provide a snap shot of the assets and liabilities of a business
at a point of time. The Balance Sheet has three main parts:
• ASSETS – everything that a business owns
• LIABILITIES – everything that a business owes
• CAPITAL – the different forms and sources of money in a business
WHAT IS THE PURPOSE OF A BALANCE SHEET?
• To show wealth or value of the business at the moment in time.
• To show the owners and managers how well the business is doing:
o It can help measure the business’s cash position
o It can allow comparisons to be made with previous years and
similar businesses.
• Checking the performance of the business might help with key decision
making.
• It is a legal requirement for companies.
Please note that the Balance Sheet overleaf is in a slightly different
format to the one in the Topic F notes. Either method is acceptable.
Balance Sheet for Computer Supercentre Ltd as at 31st June 2013
£
FIXED ASSETS
Premises
Equipment
Fixtures and Fittings
£
500,000
136,000
64,000
700,000
CURRENT ASSETS
Stocks
Cash in Bank
Debtors
20,000
62,000
8,000
90,000
LESS CURRENT LIABILITIES
Trade Creditors
Expenses Owing
10,000
30,000
40,000
NET CURRENT ASSETS
LESS LONG TERM LIABILITIES
Bank Loan
50,000
95,000
NET ASSETS
FINANCED BY:
CAPITAL EMPLOYED
Share Capital
Retained Profits
95,000
655,000
575,000
80,000
655,000
BUSINESS RATIOS
WHO WILL NEED TO KNOW HOW A BUSINESS IS DOING?
• OWNERS – to see if they are getting a good return on their investment
• MANAGERS – they have a responsibility to the owners to make the
business perform well
• EMPLOYEES – will want to keep their jobs
• CREDITORS – any organisation that lends money will want to be sure
that the money will be repaid, with interest
• CUSTOMERS – want the business to continue to supply them with
products
• GOVERNMENTS – the higher the profit, the more tax the government
receives.
THE RATIOS
•
GROSS PROFIT MARGIN
= Gross Profit x 100
Sales Revenue
This shows how much gross profit a business earns per £ of sales
revenue.
•
NET PROFIT MARGIN
= Net Profit x 100
Sales Revenue
This shows how much net profit a business earns per £ of sales revenue.
Revision notes adapted from Business Studies B by Denby and Thomas
(2001), GCSE Business Studies by Anderton (2001) and tutor2u.net