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Cash Flow - Teaching Business

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Cash Flow - Teaching Business Powered By Docstoc
					What is Cash Flow
all about?

A business which has a poor cash flow is not likely to
survive very long....CASH FLOW IS VERY IMPORTANT!

Hmm....okay but what actually is cash and how is it any
different to profit?


Well take a look at our skeleton here.

Imagine profit as the bones in this
skeleton. When we were small children
our bones were much smaller than they
are now.
Profit acts in a similar way. When a
business is just starting they have very
small profit levels but as they get bigger,
their profit levels grow.



But what is needed to make this skeleton
come alive?
                 Did you get the right answer? The
                 skeleton still needs blood, muscle, and
                 tissue to come alive!




Think of cash as the blood
flowing around the business.
Blood is essential to a body
surviving. Without it the body
will die. The same is true of a
business and cash!


A successful business must try to have more cash
flowing in than they have flowing out. This is called
having a POSITIVE CASH FLOW.

If a business allows more cash to flow out than to
flow in, then this is called a CASH FLOW DEFICIT.


    This can be a big problem!
                      How does cash flow in and out
                      of a business?




                  Ok well let’s have a look at a
                  typical teenager and see if
                  we can work out their cash
                  flow.




    IN                                    OUT
£20 Pocket Money                       £15 Clothes
£10 Paper Round                        £10 Food
£5 from Granny




WHY DOES THIS TEENAGER HAVE REASON TO
             BE HAPPY?
      Anything that causes cash to enter a
      business is an inflow and anything that
      causes cash to leave a business is an
      outflow!




Our teenager on the previous page
was lucky. She had more cash flowing
in than flowing out. If she were a
business then she would be said to
have a POSITIVE CASH FLOW.


What do you think would have happened if the
teenager in our example had spent £50 on clothes?
She only had £35 cash to spend that week but if she
spent £50 on clothes and £10 on food then she would
have spent £25 more than she actually had!
There are two possible options. She might have had to
take some of the clothes back i.e. spend less money.
Or she could have asked her mum and dad for a loan
until next week.
Businesses work in the same way. If they do not have
enough cash in their account to buy something that
they need then they might have to ask their bank for an
OVERDRAFT. This is a very short-term loan that allows
them to spend more than is in their account but interest
is charged everyday on the amount they spend!
              Bob the Blob’s Question Time
              Can you put each of these items into the
              correct place in the table. Which items
              are cash inflows and which are cash
              outflows?
                           ITEMS
Staff Wages        Electricity Bill     Rent Payment
Sales Revenue      Gas Bill             Telephone Bill
Sale of an Asset   Insurance            Car MOT

     CASH INFLOW                      CASH OUTFLOW




       ARE THERE MORE OUTFLOWS OR INFLOWS?
                Bob the Blob’s Question Time
                Try and answer these questions.


What is it called when a business has more cash
flowing out of their business than is flowing in to it?



Explain how a business can use an overdraft to help
them to solve a cash flow deficit problem.




Give ONE problem of using an overdraft.




What TWO ways might a business be able to increase
their Sales Revenue? (Hint. Think about their prices
and their costs!)
                     Can you please explain the
                     main difference between cash
                     and profit to me?



                  Yes....this is something that
                  many students get confused
                  by so don’t worry about it.


Profit is actually only a PAPER VALUE. This means that it
has not actually gone into your bank account yet. It
has not been turned into cash. It is an amount of
money that you have made in theory but remember
that sometimes people will not pay you!


Cash is just that....it is money that is
actually in your bank account and is
something that you can spend. This is
why cash is vital to the day-to-day
running of any business.


NEVER MENTION PROFIT WHEN TALKING ABOUT CASH!
        THEY ARE VERY DIFFERENT THINGS.
                    Ok I get that now. What
                    is a Cash Flow Forecast?



                  CASH FLOW FORECASTS

                  Cash flow forecasts are a prediction
                  (forecast) of what the business
                  expects their cash inflows and
                  outflows are going to be over a
                  period of time.

              How accurate are cash
              flow forecasts?

Ahh now this is the problem!

                    When forecasting the weather they
                    often get it wrong. Why? Well
                    there are so many things that could
                    change e.g. the wind might alter
                    direction and bring rain instead of
                    sunshine.
                    The golden rule to remember is the
                    further into the future you try to
                    forecast, the more likely it is that
                    your forecast will be wrong!
                                             Right so how do I make my
                                             own cash flow forecast?



                       WHAT’S A CASH FLOW FORECAST LOOK LIKE?



                             January         February         March         April         May           June
       INCOME

    Sales Revenue        £      97,500   £     105,895    £    65,000   £    69,500   £   73,750    £    60,000
        Other            £       5,000   £       1,250                                £    5,000

TOTAL CASH INFLOWS       £ 102,500.00    £ 107,145.00     £ 65,000.00   £ 69,500.00   £ 78,750.00   £ 60,000.00

      EXPENSES

    Electricity Bill     £      12,500                                                £    9,500
      Insurance          £       5,000   £       5,000    £     5,000   £     5,000   £    5,000    £     5,000
  Rent for Buildings     £      10,000   £      10,000    £    10,000   £    10,000   £   10,000    £    10,000
        Wages            £      50,000   £      70,000    £    44,000   £    44,000   £   46,000    £    44,000
     Stock Costs         £      15,000   £      18,500    £     9,000   £    11,500   £   13,500    £     9,500
       Vehicles                                           £       500

TOTAL CASH OUTFLOWS      £ 92,500.00     £ 103,500.00     £ 68,500.00   £ 70,500.00   £ 84,000.00   £ 68,500.00

NET CASH FLOW (+ or -)   £ 10,000.00     £     3,645.00   -£ 3,500.00   -£ 1,000.00   -£ 5,250.00   -£ 8,500.00

  OPENING BALANCE
  (Brought Forward)       £4,500.00      £14,500.00       £18,145.00    £14,645.00    £13,645.00    £8,395.00

  CLOSING BALANCE
  (Carried Forward)      £14,500.00      £18,145.00       £14,645.00    £13,645.00    £8,395.00      -£105.00
 You are
 joking....I can’t
 learn all of that!


Relax.....it’s honestly not as bad or as difficult as it
seems at first. We will break this down in to small and
easy to learn sections.

INCOME

Ok well this shows all of the cash that is flowing in to
the business. You simply have to add it all together
and you can find out the value for the Cash Inflows
e.g. for January we add £97,500 (sales revenue) to
£5,000 (other) and we get a total of £102,500.



EXPENSES
This shows all of the cash that is flowing out of the
business. Once again, all we have to do is to add all
of the items together. E.g. for January we add
together £12,500 (electricity), £5,000 (Insurance),
£10,000 (Rent), £50,000 (wages) and £15,000 (stock).
This all comes to a total of £92,500.
NET CASH FLOW
Again not difficult this bit....all you need to do is to
take away Total Cash Outflow from your Total Cash
Inflow. E.g. for January we subtracted £92,500 from
£102,500 to arrive at the value of £10,000.

OPENING BALANCE
This shows the amount of cash that you have
available to you at the start of the month. This figure is
easy to work out because what is your closing
balance from the previous month becomes your
opening balance for next current month. E.g. You
ended January with £14,500 and this then becomes
your opening balance for February.
                     January      February      March

 OPENING BALANCE
 (Brought Forward)   £4,500.00    £14,500.00   £18,145.00

 CLOSING BALANCE
 (Carried Forward)   £14,500.00   £18,145.00   £14,645.00



CLOSING BALANCE
You calculate the closing balance by adding your
Net Cash Flow (+ or -) to your Opening Balance. For
January this meant adding £10,000 to £4,500 to give a
figure of £14,500.
                           Bob the Blob’s Question Time

                      Work out the values of the blanks in the
                      cash flow forecast.


                                   January         February         March
         INCOME

      Sales Revenue            £      12,000   £       9,000    £ 14,000
          Other                £       5,000    £          -     £     -

  TOTAL CASH INFLOWS           £ 17,000.00     £     9,000.00   £ 14,000.00
                                      A
        EXPENSES

         Heating               £         750
       Insurance               £         250   £         250    £       250
    Rent for Buildings         £       2,000   £       2,000    £     2,000
         Wages                 £       6,000   £       6,000    £     6,000

  TOTAL CASH OUTFLOWS          £    9,000.00   £     8,250.00   £ 8,250.00

  NET CASH FLOW (+ or -)       £
                                      B
                                    8,000.00   £      750.00    £ 5,750.00

    OPENING BALANCE
    (Brought Forward)           £4,500.00      £12,500.00            D
                                                                £13,250.00

    CLOSING BALANCE
    (Carried Forward)          £12,500.00            C
                                               £13,250.00       £19,000.00




Explain two ways which this business could try and
raise the value of their sales revenue in February.
                 Bob the Blob’s Question Time




If this same business tried to predict their cash flow all
the way up to December explain in your own words
why they should be cautious about the accuracy of
their figures.




The business discovers that they are going to be short
of cash in June. Explain ONE method that they could
use to solve this problem.
Copy out the paragraph below and use the words in the box to fill in
the gaps.

OVERDRAFT          ELECTRICITY        SALES REVENUE      WAGES

SURPLUS            DEFICIT            FORECAST           STATEMENT

A cash flow _________________ is used by a business to show the
predicted inflows and outflows of cash from a business. This is different
from a cash flow _____________________ that shows the cash that has
been actually spent by a business. If a business has more cash
flowing in than flowing out then they have a cash flow _____________.
The opposite of this is to have a cash flow ________________ when you
have more cash flowing out than flowing in! A normal solution to this
problem is for the business to arrange an __________________ with their
bank. Two examples of cash outflows are __________________ and
______________. An example of a cash inflow is ____________________.


Explain in your own words the main differences between Cash
and Profit.

				
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posted:9/12/2011
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