Post on 26-Dec-2015
Cash Flow
Calculation and Interpretation of Cash Flow Forecast
Movement of money into and out of a business.
Importance of Cash Flow
Essential to short-term survival
Poor cash flow - most common reason for failure
Shows expected cash inflows and , cash outflows and estimated bank balance, usually on a month by month basis over a period of 6 to 12 months.
Cash Flow
Cash Flow Forecast
Calculation and Interpretation of Cash Flow Forecast
Importance of Cash
Cash versus Profit
Profit: difference between revenue and expenses.
Eg: Sales £120,000. Costs £85,000. Profit = £35,000.
Importance of Cash
Cash versus Profit
However: If part of profit still owed by customers, profit may not / never be realised as cash.
Also: Business may have more cash in bank than profit – may not yet have paid suppliers for services received.
Purpose
Cash might have to be borrowed.
Cash could be invested
Identify periods when:
Calculation and Interpretation of Cash Flow Forecast
Cash inflows. Cash outflows. Opening and closing bank
balance.
Three main sections:
Construction
Calculation and Interpretation of Cash Flow Forecast
Net cash flowdifference between inflows and outflows.
Construction
Calculation and Interpretation of Cash Flow Forecast
Not all goods / services are paid for immediately on receipt.
Customers often given credit - usually 30 to 70 days.
Timing of receipts / payments needs careful consideration.
Importance of Timing
Calculation and Interpretation of Cash Flow Forecast
Produce three-monthly cash flow forecast for business specialising in tailoring men’s suits, based on following:
Example
Calculation and Interpretation of Cash Flow Forecast
1. Opening balance - April - £2600.
2. Forecast sales April, May, June - £4000, £5200, £8000. One quarter – immediately in cash. Remainder – one month later. NB Credit sales for March - £2800.
Example
Calculation and Interpretation of Cash Flow Forecast
3. Material costs - £1200, £1400, £1800 respectively. One month’s credit from suppliers. NB Material purchases for March - £1200.
Example
Calculation and Interpretation of Cash Flow Forecast
4. Wages - £1200, £1500, £1700. Paid directly to bank accounts - end of month. Some also paid in cash.
Example
Calculation and Interpretation of Cash Flow Forecast
5. Plans to purchase £6000 machinery - start of April. Paid - immediately by cheque.
Example
Calculation and Interpretation of Cash Flow Forecast
6. Telephone – payablequarterly - £300 forecast.
Payable in June.
Example
Calculation and Interpretation of Cash Flow Forecast
Apr May Jun A. Cash inflows Cash Sales 1000 Credit Sales Total cash inflow (A) Purchase of Materials Payment of Wages Purchase of Machinery Telephone Bill Other expenses Total cash outflows (B) C. Opening balance 2600 D. Net cash flow (A-B) E. Closing balance (C+D)
Problem in April & May - due to purchase of new machinery.
Example
Calculation and Interpretation of Cash Flow Forecast
Effective aid to decision making and control but…….depends upon accuracy of amounts and timings.
Perils
Calculation and Interpretation of Cash Flow Forecast
Many factors outside firm’s control – degree of flexibility required, particularly if new business.
Perils
Calculation and Interpretation of Cash Flow Forecast