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Using a cashflow forecastL/O: demonstrate an understanding of cash flow

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Learning Objective Outcome Who? Keywords

Explain what cash flow means

I can explain the difference between cash and profit

ALLD

(AO1)

Cash flowCash inflowCash outflowDebtorsCredit salesNet monthly cash flowOpening BalanceClosing balance

Be able to structure and measure cash flow in a business

I understand the structure of a typical cash flow forecast

I understand how a profitable business can run out of cash

MOSTC-B

(AO2 & 3)

Evaluate ways in which a firm’s cash flow might be improved and problems overcome.

I am able to evaluate the methods that business can use to overcome cash flow problems.

SOMEA

(A04)

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What is ‘cashflow’? The flows of money into and out of the businessMoney flows in through revenue from sales of service or productMoney flows out when wages and expenses are paid or stocks are purchased.

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The principle of cashflow 1More money IN than OUT = cashflow positive. BUT high surplus of cash should be avoided in non-interest bearing account)More money OUT than IN = cashflow negative. Can mean shortage of cash topay bills

AIM is to have a positive cashflow or at least a balance.

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The principle of cash flow

Cash too high

Cash OK

Cash too low

Revenuein

Expenses out

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InflowsInflows = money received from

CustomersLocal and national government grantsSale of property or equipmentLoans

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OutflowsOutflows = money spent by the business

onWages and salaries for staffRaw materials or stockGas, electricity, water and telephoneRent and business ratesInterest on loansVATEquipment purchases

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Example…Click Here

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Cashflow forecastsCashflow forecasts are prepared when:

A new product or service is plannedNew resources (eg new machinery) is being boughtA major sales campaign is plannedThere will be a large increase in existing activities, eg making or selling many more products

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A basic cashflow diagramJan£

Feb£

Mar£

Apr£

May£

June£

Opening balance

5,000 7,000 4,000 6,000 12,000 15,000

Add inflows 20,000 22,000 18,000 20,000 23,000 18,000

Total 25,000 29,000 22,000 26,000 35,000 33,000

Less outflows

18,000 25,000 16,000 14,000 20,000 33,000

Closing balance

7,000 4,000 6,000 12,000 15,000 0

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http://www.youtube.com/watch?v=U5MAKenfBEM

6:30Points raised……