Aims for today• Explore what is meant by the term ‘Cash flow’ • Discuss the role and importance of cash in a business

• Recognise the difference between a cash flow forecast and a cash flow statement

• Appreciate how careful planning can minimise risk

Cash and cash flow

• Cash is vital to a businesses success and includes notes, coins and money in the bank.

Cash flow is: The flow of money into and out of a

business

Cash inflows

Cash Inflows are the cash coming into a business

Cash inflows

Cash from the individual

Loan from the bank

Cash from sales

Cash outflowsCash outflows is the cash going out of a business

(the payments it makes to others)Cash outflows

Wages & training

Telephone, gas, electric & other bills

Equipment & Stock

Maintenance & repairs

Advertising

Interest on loans

Cash flow example

Think about Nestles new Milkybar Moments...

yummmmmmm...

• In your groups, make a list of the all the cash inflows and cash outflows that Nestle may have.

•Best answers MAY get a taster...

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.

The importance of cash • Why is cash important in a business?

• Cash flow is essential to prevent a business becoming INSOLVENT.

Insolvency is when a business can no longer pay its debts.

Can you think of any recent examples?

Companies that no longer exist... 1. MFI

2. Royal Doulton (Waterford Wedgewood)

3. Zavvi Entertainment

4. HBOS Bank– but rescued by government

5. Adams (children's clothing retailers)

6. Barratts and Priceless (shoe shop chain)

Companies that no longer exist... 7. Viyella (clothing business)

8. Passion for Perfume (retail chain)

9. Land of Leather (furniture)10. Newcastle Productions

(distributor of Findus foods)

11. Blooming Marvellous, (maternity-wear retailer)

12. XL Airlines

And of course...Woolworths

Joes Bar – Debt Management

http://clipbank/espresso/clipbank/servlet/link?macro=setresource&template=vid&databaseType=cms&resourceID=33&taxonomyNodeID=542

3 mins

Cash Flow Forecasts

• The cash flow forecast allows businesses to plan their finances. It is a prediction of the money that will come into and out of the business.

They use them to:1. See how well they should be performing2. To see if action needs to be taken to avoid a cash

crisis3. Help them apply for/secure loans from the bank

Over optimistic forecasting• Businesses are sometimes over optimistic

when forecasting their cash flow. What impact could this have?

• Essentially, they could end up spending money they don’t have because they think they will make it back in the future (according to their forecast). Forecasts need to be done CAUTIOUSLY.

Cash flow forecast for Floral Events

The OPENING BALANCE is: The cash balance at the start of the month

The NET CASH FLOW is added to the opening balance to get the CLOSING BALANCE.

The CLOSING BALANCE will become the opening balance for the next month

Lets look at the example...

Floral Events £ January February March April May June

Receipts 2,400 2,400 3,000 3,400 4,500 5,00

Payments 2,200 2,500 3,400 4,000 4,200 4,200

Net cash flow

200 -100 -400 -600 300 800

Opening balance

0 200 100 -300 -900 -600

Closing Balance

200 100 -300 -900 -600 200

Cumulative cash flow

The CLOSING BALANCE shows the CUMULATIVE CASH FLOW

Cumulative cash is the build up of cash in a firms bank account

Task

• Look at the Floral Events Case study p77.

• Does the company have a cash flow problem?

• If so, what action can Holly take to overcome this?

Cash flow problems

What affects cash flow?

Factors affecting cash flow

Factors affecting cash flow

Sales

Costs

Credit terms

Stock levels

• Sales can change

• Costs can change

• Credit terms can change

• Stock levels can change

Factors affecting cash flow

Negative cash flow• In the case study, Floral Events had NEGATIVE

CASH FLOWS in March, April and May.

• Negative cash flow is also known as being ‘IN THE RED’. It happens when a businesses OUTFLOWS are greater than its INFLOWS.

Cash Flow ExerciseThe table on the next slide shows a cash forecast for a new nightclub started with £250,000 of CAPITAL. The forecast is based on some key points:

• Building work will be finished by September so customers can come in October.

• A launch party will bring the customers and publicity needed for success.

• Costs will be as predicted so the company will not have to dip into their OVERDRAFT facility.

Club Woo WooFigures in£0000’s

Aug Sept Oct Nov Dec Jan

Cash at start 250 65 10 20 25 55

Cash in 0 0 85 65 115 55

Cash out 185 55 75 60 85 60

Net monthly cash

(185) (55) 10 5 30 (5)

Cumulative cash

65 10 20 25 55 50

Answer the questions1. Give 2 benefits of cash flow forecasting for a new,

small firm. (2)

2. Using the table;

(a) explain briefly 2 reasons why the firms cash flow has fallen from £250,000 in August to £10,000 by September. (4)

(b) Explain the likely effect on the firms cash position if the building work was not completed until November. (4)

The importance of planning• Planning will help businesses to avoid cash flow problems. A strategy to

avoid problems is GET IT

• Get the help/support of banks/investors• E – Ensure market research is thorough• T –Thoughtful cash flow planning will help

• I – investigate where you get help spreading payments more evenly

• T – Track the ACTUAL cash flow against the FORECAST

G E T

I T

Now for a game...Cash flow drag & drop and cash flow model

http://www.businessstudiesonline.co.uk/live/index.php?option=com_content&view=article&id=2:edexcelgcse-activities&catid=3:gcse-business-activities&Itemid=5

Homework – Due Thurs 3rd Dec1. Answer ALL the questions on page 79 2. Pocketbook Revision: pages 51-54 & 56-58

Mr Elephante says “Don’t forget to remember to:

•Use FULL sentences •Use FULL STOPS at the end of your sentences• Use CAPITAL letters at the beginning of sentences and for the names of people & places. • Date and title your homework

Topic 1.3 Chapter 16

The Business

Plan

Page 80-81

The Business Plan• A business plan is a detailed development plan for a

business. It includes information about the company’s:

• Location• Ownership• Products/services• Resources• Production methods• Marketing• Financial details• It is usually completed on a 2-5 year basis

Group Task • In your groups decide on a company that you will start

up.

• Using the example, draw up a business plan and include a cash flow forecast.

• Next week you will deliver a presentation to a very important panel (the bankers, who will decide whether or not to give you a loan).

• You must be able to justify your business plan details, decisions and forecasts. You should dress appropriately.

The Business Plan The plan must include:

Section 1: The business idea

Section 2: Resources and quality issues

Section 3: Financial resources

Section 4: Feasibility and evaluation

Quick Quiz

• What is the opening balance?

• What is the closing balance?

• What does the Net cash flow mean?

• What is the cumulative cash flow?