Unit 3.7: Cash Flow

Profit

= Total revenue - Total cost

• Profit it only made after all costs are paid for 

Cash Flow STATEMENT

Financial document that shows the details of the actual cash inflows and outflows for a given time period

Bad Cash Flow

• Improper credit control 

• Expands too quickly and they run out of cash while trying 

• Seasonal variations of demand 

• Being cash rich but unprofitable - the amount coming in doesn’t compensate for the costs

Cash Flow Forecast

FInancial tool to show the expected movement of cash in and out of the business 

What is included in a cash flow forecast

1. Cash Inflows: Cash coming into a business during the time period

2. Cash Outflows: Cash leaving the business during a given time period

3. Net Cash Flow: DIfference between the cash inflow and outflow for the time period 

Reasons to have a Cash Flow Forecast

• Banks and lenders like to look at the firms financial position and health and whether they want to help

• Managers: Anticipate periods with liquidity problems and plan accordingly 

• Facilitate business planning

Making a cash flow forecast

1. Opening Balance: Amount of cash at the beginning of a trading period 

   • The same value as the preceding month’s closing balance  

2. Inflows: Amount coming in (Italicized title)

   • Cash sales revenue 

   • Other incomes 

   • CREDIT SALES - money isn’t received until the next month

3. Total Cash Inflows: Add up the inflows (bolded)

4. Outflows: Amount leaving  (italicized title)

   • Stock, Labour costs, Other costs

5. Total Cash outflows: Add up the outflows (bolded title)

6. Net Cash flow: Add up the total cash outflows and inflows (Bolded title) 

7. Closing Balance: Amount of cash at the end of a trading period (Closing balance = Opening balance + Net cash flow)

Causes of Cash Flow Issues

1. Overtrading: When a business attempts to expand too quickly (or aggressively) without the sufficient resources to do so

2. Over borrowing

3. Overstocking

4. Poor credit control

5. Unforeseen changes

Credit Control

• Monitoring and managing debtors, such as ensuring only suitable customers are given trade credit and that customers do not exceed the agreed credit period

Bad debts

Debtors are unable to pay their outstanding invoices so it reduces the cash inflows

Strategies to help Cash Flow Problems

1. Reducing cash outflow

2. Improving cash inflow

3. Obtaining additional sources of finance

Reducing cash outflow

1. Seek preferential credit terms

2. Seek alternative suppliers

3. Better stock control

4. Leasing or renting

5. Reduce expenses

Improving cash inflow

1. Tighter credit control

2. Cash payments only

3. Change pricing policy

4. Improved product portfolio

Obtaining additional sources of finance

1. Overdrafts

2. Selling fixed assets

3. Debt factoring: involves an external party taking over the collection of money owed by debtors

4. Government assistance

Limitations, assumptions and inaccuracies of cash forecasts

1. Marketing: Inaccurate or poor market research can lead to incorrect sales forecasts

2. Human resources: A demoralized workforce becomes a less productive workforce that delivers poor customer service

3. Operation management: Machine failure and poor stock control - Causing delays to the firm's cash flow

4. Competitors

5. Changing fashion and taste

6. Economic change

7. External shocks