cash management cash receipts and payments. cash flows life blood of a business monitors surpluses...
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CASH FLOWS
• Life blood of a business• Monitors surpluses• Plan for shortfalls• Plan for financing arrangements• Allows planning of major purchases
TYPES OF CASH FLOWS
• Regular cash flows– The majority– Take place every day, week, month, quarter or
annually e.g. wages, suppliers, customers, taxation payments
• Irregular– As the name implies don't happen on a regular
basis e.g. Purchase of a non current (fixed) asset.
TYPES OF CASH FLOWS
• Exceptional cash flows– When something is not predicted
• For example Machinery breakdown
• Variable and fixed– Variable – amounts may change although
timescale may not e.g. Customer sales and receipts or supplier payments (30 days, etc.)
– Fixed will not e.g. Rent, unless there is a rent review
TYPES OF CASH FLOWS
• Capital and revenue payments– Capital - payments for fixed assets– Revenue - day to day transactions– E.g. Purchase of a company van is capital but the
servicing will be revenue• Capital and revenue receipts
– Capital – cash injections into the business or share capital
– Revenue – day to day receipts from trading.
TYPES OF CASH FLOWS
• Activity 2 – page 49• Payments that relate to the purchase of non-
current assets would beA Capital paymentsB Regular revenue receiptsC DrawingsD Exceptional receipts
TYPES OF CASH FLOWS
• Activity 3 – page 49• Income received from an insurance claim for
lost inventory would be classified as:A Capital paymentsB Regular revenue receiptsC DrawingsD Exceptional receipts
CASH BUDGETS
• Example of cash budget proforma
October £ November £ December £Cash receipts
Total receiptsCash payments
Total paymentsNet cash flow for the monthOpening balanceClosing balance
SALES RECEIPTS
• Cash sales– In flow takes place at same time as sale
• Credit sales– In flow takes place at some point in time after the
sale – a LAGGED receipt (30/60 days)– Some customers do not adhere to terms!– Cash received in a month may contain proportions
of sales from previous months.
ExamplePredicted Sales for the quarter
October £680,000
November £700,000
December £750,000
Of these, 20% are cash sales and the remainder on credit. Experience shows that the customers pay according to the following profile:
Payment profile
The month after the sale 20%
Two months after the sale 50%
Three months after the sale 30%
ExampleSales from the previous quarter
July £600,000
August £560,000
September £620,000
Again, 20% are cash sales and the remainder on credit. We can start to prepare the cash budget!
Cash budget – October to November
Cash receipts: October £ November £ December £
Cash sales
(20% of month sales)
136,000 140,000 150,000
ExampleCash budget – October to November
Cash receipts: October £ November £ December £
July sales
80%x 600,000x30% 144,000
August sales
80%x 560,000x50% 224,000
80%x 560,000x30% 134,400
September sales
80%x 620,000x20% 99,200
80%x 620,000x50% 248,000
80%x 620,000x30% 148,800
Example – contd.Cash budget – October to November
Cash receipts: October £ November £ December £
October sales
80%x 680,000x20% 108,800
80%x 680,000x50% 272,000
November sales
80%x 700,000x20% 112,000
Cash from credit sales
467,200 491,200 532,800
Cash budget – October to November
Cash receipts: October £ November £ December £
Cash sales 136,000 140,000 150,000
Credit sales 467,200 491,200 532,800
BAD DEBTS• Sales made on credit may result in bad debts• Some customers may never pay the debts that
are due• These should be excluded from the cash flow
forecast• Most businesses have an estimate of the
percentage of sales that will turn bad• We factor these into the forecast• REMEMBER We reduce down the last month
receipts by the % of bad debts.
BAD DEBTS
• Business makes credit sales in month 1• 30% pay the month following the invoice• The remainder pay two months after the
payment date• There is a 5% rate of bad debts
– Sales figure x 30% pay month 2– Sales figure x 65% pay month 3
TASK
• Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £320,000 , September - £360,000 and October - £400,000. What are the cash receipts from credit sales in November?
£
August sales
September sales
October sales
Total November Receipts
TASK - Answer
• Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £320,000 , September - £360,000 and October - £400,000. What are the cash receipts from credit sales in November?
£
August sales 320,000 x 25% 80,000
September sales 360,000 x 35% 126,000
October sales 400,000 x 40% 160,000
Total November Receipts 366,000
STUDENT TASKS
• Example cash flow – page 52• Example cash flow with bad debt – page 53• Activity 4 page 54• Activity 5 page 55
PAYMENTS FOR PURCHASES
• Work exactly the same as cash receipts!• We apportion the outflows according to our
payment profile• These are known as LAGGED payments.
PAYMENTS FOR PURCHASES
• Example page 56• Activity 6 page 57• Example page 57/58 – WATCH OUT in some
cases purchase figures may be forecast based on gross profit margin (revision)
SETTLEMENT DISCOUNTS
• Can be given for prompt receipt from customers• Can be received for prompt payment to suppliers• Will mean payments and receipts will be paid earlier• We reduce the in flow or out flow by the settlement
discount amount• E.g. 2% settlement discount on £50,000 of purchases
means we will only pay 98% - £49,000.
ExampleSales for the quarter
August sales £120,000
September sales £100,000
October sales £150,000
A settlement discount of 2.5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October?
£
August sales
September sales
October sales
Total October Receipts
ExampleSales for the quarter
August sales £120,000
September sales £100,000
October sales £150,000
A settlement discount of 2.5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October?
£
August sales 120,000 x 40% 48,000
September sales 100,000 x 50% 50,000
October sales 150,000 x 10% x 97.5% 14,625
Total October Receipts 112,625
OTHER PAYMENTS
• Wages and salaries (example page 59/60)• Overheads (example page 60)• Interest receivable and payable (example page
62/63)• Loans – activity 8 page 64.