forecasting cash flows
Learning Objectives:
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Starter: Complete the following sheet on Mr Crump's finances.
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So, in the way in which I have to plan my finances carefully in order to stop myself from falling into debt, businesses have to do exactly the same thing. They have to manage their cash flow.
Key term: CASH - notes, coins and money in the bank
Key term: CASH FLOW - the flow of cash into and out of a business
Key term: CASH FLOW - the flow of cash into and out of a business
It is important to recognise that cash refers to money in a business's bank account, as well as the actual 'physical' money that might be in the till or in a safe.
Over a period of time, cash will flow into a business, and out of a business. This is what is referred to as 'cash flow'.
Over a period of time, cash will flow into a business, and out of a business. This is what is referred to as 'cash flow'.
Activity: In your pairs, try to think of all the different things that businesses might spend their cash on (outflows) and where a business might receive cash (inflows). Do this in the table on the back of your first sheet. (Hint: Some of them are quite similar to my personal cash flow.)
Key term: INFLOW - the cash flowing into a business, it's receipts
Key term: OUTFLOW - the cash flowing out of a business, it's payments
Key term: OUTFLOW - the cash flowing out of a business, it's payments
The typical inflows for a business are:
- Owner's funds
- Bank loan
- Cash from sales
The typical outflows for a business are:
- Wages
- Equipment
- Utilities (phone, gas, water, electricity and other bills)
- Rent/mortgage
- Stock
- Interest on loan
- Advertising
Activity: Complete the inflows and outflows table.
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Key term: NET CASH FLOW - the receipts of a business minus it's payments
your_own_business_idea_cash_flow.docx | |
File Size: | 13 kb |
File Type: | docx |
A business cannot survive without cash. The effects of not having any cash would mean that bills wouldn't be paid and the business would be taken to court. Staff would leave as they would not be getting paid. Suppliers would stop delivering stock as they would also not be getting paid. The business would fail as it would become insolvent. A business needs cash to survive on a day-to-day basis.
Key term: INSOLVENCY - when a business can no longer pay it's debts
There are several factors that can affect cash flow. They are:
- Sales can change - the number of sales a business makes can vary over a period of time.
- Costs can change - the payments a business makes can become cheaper or more expensive over a period of time
- Credit terms can change - when a business buys supplies or equipment, it might not pay for them until 2 or 3 months time
- Stock levels - if a business buys stock in bulk, it may mean a cash shortage until they are sold
Questions: Talk to your partner for 3 minutes about the following questions:
- Why do some businesses have busier periods? Give an example
- Why can business costs change over a period of time. Give an example
- Why do businesses rely on trade credit? Give an example
- Why would a business choose to bulk buy and experience a negative cash flow?
Plenary: Complete the following activity recapping everything you have learnt this lesson.
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Learning Objectives:
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Question: Why is cash flow important to a business and the owner?
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Cash is vital for the success of a business. This means businesses must plan ahead to make sure that they always have enough cash in the business to survive. They can do this by producing a cash flow forecast.
Key term: CASH FLOW FORECAST - a prediction of how cash will flow through a business in a period of time in future.
Businesses use cash flow forecasts:
- to see how well they should be performing in the near future; cash flow forecasts are part of a business plan
- to see if action needs to be taken to avoid a cash crisis
- to take to the bank if the business needs a loan to cover a shortage of cash
cash_flow_forecasts.docx | |
File Size: | 12 kb |
File Type: | docx |
Have a look at the cash flow forecast in front of you. It is for the first 6 months of trading for a new business.
- The opening balance is the cash balance at the start of the month. In January when the business starts, it is zero.
- The net cash flow is added to the opening balance to give the closing balance. In January the opening balance is 0 and adding net cash flow of £200 gives a closing balance of £200. The closing balance becomes the opening balance for the next month (why do you think this is?)
- The closing balance shows the cumulative cash flow of the business
Key term: OPENING BALANCE - the amount of money in a business at the start of a month
Key term: CLOSING BALANCE - the amount of money in a business at the end of a month
Key term: CUMULATIVE CASH FLOW - the sum of cash that flows into a business over time
Key term: CLOSING BALANCE - the amount of money in a business at the end of a month
Key term: CUMULATIVE CASH FLOW - the sum of cash that flows into a business over time
This cash flow forecast shows that the business won't survive the first few months of trading. This would require action to fix:
It does also show that the problems are temporary. Cash flow becomes positive in May and June and by June the closing balance is positive. But in order to survive this long, the cash flow crisis in March needs to be addressed.
- increasing sales revenues
- reducing costs
- putting more money into the business or getting a bigger bank loan
It does also show that the problems are temporary. Cash flow becomes positive in May and June and by June the closing balance is positive. But in order to survive this long, the cash flow crisis in March needs to be addressed.
3.4_forecasting_cash_flows_activity.docx | |
File Size: | 40 kb |
File Type: | docx |