1.3.

3: Cash and cash-flow

LO:
• The importance of cash to a business:
• Calculation and interpretation of cash-flow forecasts

Do now
Copy down title, key terms and complete the recap question.

Key terms:

Recap: • Cash flow forecast

• Closing balance
• Net cash flow
• Opening balance
………..Recap

1. Define fixed cost

2. Define Variable cost
3. Define Break-even
4. How do we calculate Break even point?
5. How do we calculate total costs?
6. How do we calculate contribution?
 From Edexcel

• To be able to discuss the importance of cash

to a business
• To be able to calculate cash flow forecasts
• To be able to interpret cash flow forecasts
Part 1

The importance of cash to a

business
• To pay suppliers, overheads and employees
• To prevent business failure (insolvency)
• The difference between cash and profit.
 To pay suppliers, overheads and employees
• Suppliers – those businesses which supply the company with
stock or other supplies such as ink for a printer.

• Overheads are costs of a business that do not directly contribute

to the cost of making the product or performing the service.
Yes - overhead No – not overhead
• Administration costs of the • Raw materials
business
• Accounting costs of the business • Employee wages
• Business Insurance
• Utility bills for the business e.g.
gas / elec / water
• Advertising costs
• To pay employees

If a business does not pay its employees the following may happen:

A. The employees may leave the business, which will cost more to recruit
new people.

B. The employees may get angry and decide to take legal action against
the business.
The difference between cash and profit

• Profit: Total revenue minus total costs in a business,

or what is left once all the bills have been paid.
(Profit = TR – TC)

• Cash: money available in the business to pay the

bills, cash may not come in the same month as it
goes out.
To prevent business failure (insolvency)

• “Cash is king” is an expression some business people may

use – this is a way of showing how important it is.

• A business needs to make sure that its invoices are paid

on time so that it has cash to pay its own suppliers.

• When a business runs out of cash to pay everyone and

cannot raise finance in time it may fail.
Plenary
Calculation and interpretation of cash-
flow forecasts:

• Cash inflows
• Cash outflows
• Net cash flow
• Opening and closing balances.
Starter

My Sunday

• I left home with £20 in my pocket, I bought a newspaper for

£0.90 and went to Tesco to buy a sandwich for £3.90.

• I was on my way to Westfield, I met my friend who gave me

£10.00 that owe them for a while.
•
• I bought a jumper from Primark for £18 but I returned it shortly
after and got a full refund.

• How much cash I'm left with.

 What is cash-flow forecast?

A cash flow forecast is a prediction

of how cash will flow into and out of
a business in the future.
………Cash Flow
• Cash flow is the relationship between the money flowing
into a business (inflow) and the money flowing out
(outflow)

Cash inflows Cash outflows

What do you think the cash inflows and

cash outflows of a festival might be?
 Cash inflows and outflows

Inflows Outflows
• Sales revenue from tickets. • Cost of the music bands
• Sales revenue from stall • Cost of hiring the site
rents. • Cost of security staff
• Sales revenue from car • Cost of administration
parking.
• Cost of accountants

• Can you think of any others?

 Cash flow forecast uses

• Cash flow is day-to-day running of a

business budget.
• Shows where the business will have a
shortfall of cash (not enough to pay
bills).
• Allows the business to organise short-
term cash borrowing to cover the
shortfall.

Example cash flow forecast

 Activity
Businesses need to make sure that there is enough cash coming
into the business (cash inflow) to pay for any cash going out
(cash outflow)
For the items below suggest whether they represent a cash inflow or a cash outflow.

Recreate the table below in your notes.

1. Equipment hire. Cash inflow Cash outflow

2. Cash receipts from the sale of goods.
3. Obtaining a loan from the bank
4. Wages
5. Interest payment on loan.
6. Payments to a supplier.
7. Entrepreneurs own savings.
Businesses need to make sure that there is enough cash coming into the business
(cash inflow) to pay for any cash going out (cash outflow)

Cash inflow Cash outflow

Cash receipts from sales of goods Equipment hire.

Obtaining a loan from the bank Payments to a supplier.

Entrepreneurs own savings. Interest payment on loan.

Wages

Key question: Why can cash flow and profit

NEVER be used in the same sentence..?
 Net Cash flow =
The receipts (money coming in - INFLOWS) of a
business minus it’s payments (CASH COMING OUT
outflows).
Net cashflow= Cash inflows- cash outflows
 Activity 1
Cash flow forecast (Jan – March)

Calculate the Net Cash flow in Feb and March ?

(£) January February March
Cash in/receipts 2,400 2,400 3,000

Cash out/payments 2,200 2,300 3,400

Net cash flow 200 ? ?

 Opening and closing balance
Key terms

• The opening balance is the amount of money in a

business at the start of a month.

• The closing balance is the amount of money in the

account at the end of a month.

Closing balance = Net cash flow + opening balance

………..Activity 1

Businesses will often start the month with money left over from the previous month. This can
be added to the companies opening balance (in the example below money has been left
over from December (£1000)

Calculate the opening and closing balance for February and March ?
(£) January February March
Cash in/receipts 2,400 2,400 3,000
Cash out/payments 2,200 2,300 3,400

Net cash flow 200 100 -400

Opening balance 1000 ? ?

Closing balance 1200 ? ?
 Your turn answer the questions in the
blue box below. Draw this table into your
notes and complete.

Calculate : (£) April May

Cash in/receipts 3,700 3,800
1. The Net cash flow in April Cash out/payments 2,500 4,200
2. The closing balance in April Net cash flow ????? ?????
3. The Net cash flow in May Opening balance 300 ?????
4. The closing balance in May Closing balance ????? ?????

Opening balance = Net cash flow = The closing balance =

The cash balance at the start of the Cash in/receipts of a business minus its The opening balance + the net cash
month Cash outflow/payments flow
 Start up business cash flow forecast (Jan – March)

1. How can you tell this business is a start up?

(£) Jan Feb March April May
Cash in/receipts 2,400 2,400 3,000 3,700 3,800

Cash out/payments 2,200 2,500 3,400 2,500 4,200

Net cash flow 200 -100 -400 1,200 -400
Opening balance 0 200 100 -300 900
Closing balance 200 100 -300 900 500

2. Looking at the table above decide which months that the company has a net cash flow
problem.
3. Which month shows that the business is in serious danger of failure ? Explain your
answer.
4. What could the owner of the business do to make sure they have enough money to pay
their bills and not go out of business ?
5. In what circumstances can the business continue to operate with a negative cash flow ?
 Start up business cash flow forecast (Jan – March)

1. How can you tell this business is a start up? Opening bank balance 0

2. Looking at the table above decide which months that the company has a net cash flow problem.
Feb (-100), March (-400) as outflows more than inflows

• 3. Which month shows that the business is in serious danger of failure ? Explain your answer.
• March – closing balance (-300) means business van not pay creditors

4: What could the owner of the business s do to make sure they have enough money to pay their bills
and not go out of business ?
• Obtain an overdraft for March OR delay paying suppliers by agreement for 30/60 days

• 5: In what circumstances can the business continue to operate with a negative cash flow ?

It can’t do this for long. Suppliers will get annoyed and not trust you if you pay them late. Employees
will leave or be less productive if payment delayed. Defaulting on loans will incur charges and high
interest. Generally a business that month on month has a negative cash flow would cease to operate.
….continued…
In what circumstances can the business continue to operate with a negative cash flow

The company had a negative cash flow and insufficient money available from
elsewhere to cover the shortfall in revenues.
In cases such as these the business will be unable to pay it’s debts .
This will lead to the business being declared bankrupt. If it is a limited company
(ltd/plc) (a solvency firm will take over the accounts and use company assets to pay
off creditors. If it is an unlimited (liability) company, initially the same process
happens, but a creditor can legally pursue the individuals wealth for any debt owed.
 How can the business improve
their cash shortfall?
Inflows of cash into the business Outflows of cash from the business
• Arrange an overdraft. • Reduce waste and economise
• Cut costs
• Discount and promote to encourage
more revenue. • Reduce credit given to customers
buying (immediate payment
• Organise trade credit with the supplier required)
• Use a cheaper supplier
• Organise trade credit with the
supplier
Have a go at calculating some figures within the cash
flow forecasts independently & answer the summary
questions.
 (£) Sept Oct Nov Dec

Total receipts £14,000 £15,000 £19,500

Payments

Machinery/Equipment £9,000 £0 £0 £0

Wages £5,000 £10,000 £10,000

Heating and lighting £0 £1,000 £0 £0

Other costs £2,200 £2,200 £2,200 £2,200

Materials £2,000 £2,000 £2,000 £2,000

Insurance £0 £3,500 £0 £0

Total payments £18,200 £14,200 £12,200

Net cash flow £1,300 £4,300

Opening balance 0 -£4,200 -£2,900 £1,400

Closing balance -£4,200 -£2,900 £8,700

 (£) Sept Oct Nov Dec
Total receipts £14,000 £15,000 £18,500 £19,500
Payments
Machinery/ £9,000 £0 £0 £0
Equipment
Wages £5,000 £5,000 £10,000 £10,000
Heating and lighting £0 £1,000 £0 £0
Other costs £2,200 £2,200 £2,200 £2,200
Materials £2,000 £2,000 £2,000 £2,000
Insurance £0 £3,500 £0 £0
Total payments £18,200 £13,700 £14,200 £12,200
Net cash flow -£4,200 £1,300 £4,300 £7,300
Opening balance 0 -£4,200 -£2,900 £1,400
Closing balance -£4,200 -£2,900 £1,400 £8,700
Factors that affect the cash flow of a business activity
Henry Cutting ran a small business making remote control cars. In the run up to Christmas
Henry found that he sold a large amount of cars and his net cash flow was positive enough
to pay his two staff a bonus payment in their January pay packet. However in January he
would also have to pay his suppliers for the goods that he’d sold over the Christmas
period. In addition, the cost of heating the shop was usually higher in the winter months
and his bill was scheduled to arrive in January .
Henry realised that this could lead to a problem with cash flow so decided to ask his main
supplier if he could pay them the following month (February) instead. Also because
Henry had not sold all the stock he had bought over the Christmas period he would
implement a sale in January to clear this stock.

1. What factors in the case study above affected the cash flow of
Henry’s business?
2. Specifically say how cash-flow can be positively affected by having
a trade credit agreement with your suppliers?
3. What Enterprise skills has he demonstrated ?
 Factors that affect cash-flow.
• Strong sales or weak sales.
• Costs rising or falling.
• Trade credit terms can change.
• Stock levels.

Key terms
• Trade credit terms – where a supplier gives a customer a period of time to pay a bill.

• Stock level – Materials that a business holds. Some could be materials waiting to be
used in production and some could be finished products waiting to be delivered to
customers.
 Plenary
1. A small bakery has just launched a new range of cakes. Which of the following is not a cash inflow for the
small business ? Select one answer.

A Capital from the owner to help launch the range

B Buying ingredients for the cakes
C A loan to help launch the range
D Sales from the new range of cakes

2. A business has produced a cash flow forecast for January

• Total receipts of the business are £17,000
• Total payments are £15,000.
• The opening balance is £10,000

What will be the net cash flow at the end of January ?

A £10,000
B £12,000
C £2,000
D £32,000
Sample question 1
Answer question 1
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Objectives?
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