from 3.5 to 3.8. Learn pros/cons the importance of each.
Cash Flow
Payments received by a business (inflows) and payments made by a business (outflows).
Cash Inflows
the amount of cash flowing into or earned by the business from sales, debtors and other activities, such as the sale of unused fixed assets or the rent from extra office space.
Cash Outflows
the amount of cash paid out by the business for core operations such as raw materials, creditors and electricity and other activities such as legal fees.
Net Cash Flow
the difference between the total cash inflows and cash outflows. It could be positive or negative. Typically, businesses aim for a positive net cash flow
Opening Balance
Opening balance refers to the amount of cash the business has in the bank at the beginning of the month. I
Closing Balance
the amount of cash that the business has at the end of the month. It is the sum of the opening balance and the net cash flow.
Cash Flow Forecasts
A prediction of future cash inflows, cash outflows and net cash flow for a specific time period. To manage their operations effectively and avoid cash flow problems.
Cash Flow Forecasts Elements
Opening Balance, Cash inflows, Cash outflows, Net cash flows, and Closing balance.
Strategies to Increase Cash Inflows
Tighter credit control
Accepting cash payments only
Changing pricing policy
Improving the firm’s product portafolio
Strategies to decrease Cash outflows
Seeking alternative suppliers and preferential credit terms
Better stock control
Reduce expenses
Leasing rather than buying
Formulas of Cash Flow Forecast
Net Cash Flow: Cash inflows - cash outflows
Opening Balance: Closing balance - net cash flow
Closing Balance: Opening balance - net cash flow
Investment Appraisal
A process of quantative and qualitative evaluation of an investment decision.
Cumulative Net Flow (used on the investment appraisal)
cumulative net flow in previous year + net flow of current year
Payback Period (PBP)
the number of years and months it will take for the investment of a business to pay for itself.
amount left to pay/net cash flow in that year Ă— 12
Average rate of return (ARR)
the average annual amount expected from an investment
Formula is given in the booklet. Where total returns = Total net cash flows
Net present value (NPV)
A method of using a discount rate to adjust the value of future returns. Used to work out the present value of the return on an investment.
Formula is given in the booklet.
Steps:
Discount the net cash flows in each year using the present value formula
Find the net present value
If net present value is positive, then the investment would have a positive return.
Present Value
Present value (single year)= net cash flow Ă— discount factor
Found with the discount table
Discount Rate
the rate a business could earn on another comparable investment.
The discount table is given in the booklet
Budget
A financial plan for a defined period of time.
Short-term budgets: Budgets are usually set over a period of a year/monthly
Coordinated budgets: Departmental budgets typically feed into a centralised budget for the whole business.
Profit centres
A department in a business that generates both revenues and expenditures
Cost centres
for areas of the business that generate costs but no revenue.
The role of profit and cost centres
Managers can use this information to make budgets for the business as a whole with greater accuracy.
can provide teams of employees with a greater sense of autonomy over budgets.
can make better decisions about future strategy and where to invest.
Format of a budget
A budget for a profit centre will include sections for both revenues and costs. A budget for a cost centre will only have a listing of costs.
ROWS:
Income (sales revenue, interest earned…)
Costs (salaries, ads, rent…)
Net income (total income - total costs)
COLUMNS:
Budgeted figures
Actual figures
Variance (Favorable/Adverse)
Variance
Two types of variance:
Favorable [F]: A situation when the actual budget situation is better than the forecast.
Adverse [A]: A situation when the actual budget situation is worse than the forecast.
No variance [0]: This means that the actual budget situation was the same as the forecasted budget.
If the budget is for a cost centre, there will be no variance calculated for income.
The importance of budgets and variance analysis in decision - making