3.6.2 - cash flow

• Reasons why a cash flow forecast is important

  • Identifies potential shortfalls in cash balances in advance
  • Ensures the business can afford to pay suppliers and employees
  • Helps to spot problems with customer payments
  • Important part of financial planning
  • External stakeholders, such as banks, may require a regular forecast
• Common problems with cash flow forecasts

  • Sales prove lower than expected:
  • Easy to be over-optimistic about sales potential
  • Market research may have gaps
  • Customers do not pay up on time:
  • A notorious problem especially for small businesses
  • The cost of production proves higher than expected:
  • Perhaps because purchase prices turnout higher
  • Could also be due to the business operating inefficiently
  • Certain costs are not included:
  • A common problem for a start-up
  • Unexpected costs always arise – often significant
• What is cash flow?

  Process of cash flowing in and out
• Why is cash important to a business?

  It is needed to buy goods and pay bills
• What happens if a business runs out of cash?

  It will almost certainly fail
• What are running costs?

  Money spent regularly to keep business going
• How do profits relate to cash flow?

  Profits turn into cash inflows eventually
• When are profits recorded?

  When a sale is made
• What does it mean for a business to sell on credit?

  It can make a profit without cash
• What are fixed assets?

  Items held for over a year
• What is net cash flow?

  Difference between cash inflows and outflows
• What are cash inflows?

  Money coming into the business
• What are cash outflows?

  Money leaving the business
• What are overheads?

  Indirect costs to keep the company running
• Why is it important to forecast cash flow?

  To avoid insolvency and business failure
• What is a negative closing balance?

  Indicates a need for additional finance
• What does positive cash flow indicate?

  More cash inflow than outflow
• What is insolvency?

  Inability to pay business debts
• What is an overdraft?

  A flexible form of finance from a bank
• What are the risks of an overdraft?

  Bank can withdraw it at any time
• How can businesses speed up cash inflows?

  By asking customers to pay more quickly
• What is a potential solution for reducing cash outflows?

  Reviewing and cutting unnecessary costs
• How can a business increase cash inflows?

  By finding new revenue-generating methods
• What is bankruptcy?

  Legal process for unpaid business debts
• What are the consequences of cutting back on wages?

  It may damage customer relations long-term
• How can changing prices affect cash inflows?

  It can raise demand and revenue
• What is the impact of promotional activity on cash inflows?

  It can increase awareness and demand
• What is the effect of selling shares on cash flow?

  It provides an immediate cash injection
• What are the challenges of obtaining bank loans?

  Repaying can be difficult for businesses
• What is credit?

  the ability to buy a good or service and pay for it sometime in the future
• what is working capital?

  day to day money a business has in order to pay for running costs
• what are running costs?(AKA operating costs)

  the money spent regularly to keep the business going (e.g gas, petrol, electricity)
• How to calculate net cash flow

  total cash inflow - total cash outflow
• what is net cash flow?

  the difference between the total cash inflows and outflows over a period of time
• What are overheads? (SAME AS FIXED COSTS)

  all the indirect costs that a business incurs to keep the business runnning e.g rent, insurance, utlities
• What are other names for fixed costs?

  • Overheads
  • indirect costs
• Examples of cash inflows...

  • cash sales
  • personal funds invested
  • government grants
  • investments of share capital
  • sale of spare assets
• Examples of cash outflows...

  • payment of overheads
  • buying euipment
  • interest on bank loans/overdraft
  • income, operation tax, VAT
  • payment of dividends