Learning objectives
• To be able to complete a cash flow forecast table.
• To identify at least four factors that affect cash flow.
• To understand the main aspects of financial
management, such as credit terms, de-stocking as a
means of managing cash flow more effectively.
• To understand and analyze ways of increasing cash
inflows and reducing cash outflows and the effect on
cash flow positions in a variety of contexts.
What do you know
about cash flow?
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 Loan from the Cash payments
individual bank from sales
Cash inflows
Cash outflows
Cash going out of a business
Cash outflows
Equipment &
Wages & training Advertising
Stock
Telephone, gas, Interest Maintenance
electric & other bills on loans & repairs
Task 1: Cash flow
Costa Coffee
List the cash inflows and cash outflows that
Costa Coffee may have
Costa Coffee: Some ideas
Cash inflows Cash outflows
• Purchase of stock, raw
• Payments from materials or tools.
customer • Wages, rents and daily
• Interest on bank operating expenses.
accounts, savings & • Purchase of fixed assets - PCs,
machinery, office furniture, etc.
investments • Loan repayments.
• Merchandise • Dividend payments.
• Income tax, corporation tax,
VAT and other taxes.
• Reduced overdraft facilities.
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.
Cash Flow Rule:
• Closing balance for one month is the opening
balance of the next
• E.g. Closing balance for September is -500,
Opening balance for October is -500
• The formula for the closing balance is opening
balance + net cash flow.
How can a business improve
its cash flow position?
Task 4: Increasing cash inflows
Increasing
sales
revenue
Long term
solutions Cash flow De-stocking
e.g. loans
Improving
C.F from
customers
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.
Cash Flow Forecasts
• Financial document
• Shows the expected cash inflows and cash
outflows over a future period.
• Shows closing cash balance at the end of each
month
• Figures are estimated
Importance of Cash Flow Forecasts
• Identify shortages
• Support applications for funding
• Help when planning the business
• Monitor cash flow
What are the limitations of
producing a cash flow
forecast?
limitations of producing a cash flow
forecast?
[Link] only
[Link] should ask themselves what would
happen if :
a)Sales were lower
b)The customer did not pay up on time
c)Prices of materials were higher than expected
d)Spreadsheets would help the business to see
the best and worst case scenarios
Summary
A business takes out a loan from a bank
repayable over four years. This will lead to an
immediate large cash...
A inflow and smaller cash outflows over a period of
time
B inflow and smaller cash inflows over a period of
time
C outflow and smaller cash inflows over a period of
time
D outflow and smaller cash outflows over a period of
time.
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