Appreciate the importance of cash to businesses

1
Aims For Today

• Appreciate the importance of cash to businesses
• Understand the importance of cash flow management

2
The importance of cash

• A business can exist for a while without making
  profits
• But
• A business cannot exist without cash
• Cashflow problems are the most common reason for
  business failure.
• It is estimated that 70 of business fail in the
  first year due to cash flow problems

3
Cash v Profit

• Cash flow and profit are NOT the same thing
• Profit is the difference between revenue and ?
• Cash flow is the movement of money through a
  business
• It is possible for a business to be cash rich but
  unprofitable.
• A company may be profitable but unable to pay its
  suppliers (creditors)

4
Cash Flow Difficulties
A 50k order
s
50k paid from customer
20,000
Production complete
Delivery made
10,000
Order received
Profit
Materials bought
-10,000
Wages and overheads paid out
Credit period (waiting for Customer to Pay)
-20,000
Delivery to customer
-30,000
-40,000
What is the period of negative cash flow?
5
Managing Cash Flow

• Business must continually review current and
  future cash flow positions
• They review future positions by forecasting
  future cash flows
• This enables them to
• Anticipate timings and amounts of cash shortages
• Arrange financial cover for anticipated shortages

6
Reviewing the current position

• A business may review its current cash flow
  position by
• Comparing actual to forecast figures
• Analysing when their debtors are due to pay
• Taking any measure necessary to correct cash
  shotfalls.

7
Cash Flow Forecasts

• A cash flow forecast sets out the anticipated
  cash inflows and outflows.
• It shows the effect of the months cash flow on
  the firms cash balance
• It is like a mini bank statement

8
Cash Flow Forecasts

• ESSENTIAL RULE!!
• MONEY IS SHOWN WHEN IT IS RECEIVED OR PAID

9
An example

• Total Cash Inflow Total Cash Outflow Net
  Monthly Cash Flow
• Net Monthly Cash Flow Opening Balance Closing
  Balance
• Closing Balance for January Opening Balance for
  February etc.

10
Closing Balances

• A negative closing balance (a deficit) at the end
  of a month indicates there is not enough cash to
  pay the immediate bills
• A regular large positive balance (a surplus) in
  the closing balance suggests a business could
  afford to pay off some debts or buy new stock or
  equipment

11
Fill in the gaps
12
McManuss Magnificent Pies
13
McManuss Magnificent Pies
14
Banks and Cash Flow Forecasts

• A negative cash flow at any time indicates a
  company has insufficient funds
• An overdraft may be sufficient to cope
• If not preventative action must be taken quickly!

15
Homework Owed

• B1 Data response Chapter 15, page 106
• Re-do Assessment Q d (improving BE position you
  have guidance sheet!!)
• Break Even Case Study

16
Homework

• Read and make notes on Unit 18 Cash Flow
  Management
• Copy key terms from P126
• FOR NEXT LESSON