Mr Stokes. To understand the meaning of cash flow To understand why cash flow is important to a...
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Transcript of Mr Stokes. To understand the meaning of cash flow To understand why cash flow is important to a...
Mr Stokes
To understand the meaning of cash flow
To understand why cash flow is important to a business
To be able to construct & interpret a cash flow forecast
Cash Flow Forecasting
Cash flow is the flow of money into and out of a business over a given period of time
A cash flow forecast is a prediction of how cash will flow into and out of a business over a given period of time
Why is Cash Flow So Important? “Companies don’t go bust because they
lose money, they go bust because they run out of money”
“Cash flow is the most common reason for business failure. It is estimated that 70% of businesses that collapse in their first year do so because of cash flow problems.”
Banks always request a cash flow forecast as part of a business plan when considering an application for a loan
An example: A business accepts an order for £50 000. It predicts costs of £40 000 and a profit of £10 000. Why might it face cash flow problems in completing the order?
Importance of Cash Flow£ cash flow
+20 000
+10 000
-10 000
-20 000
-30 000
-40 000
Materials Bought
Wages &
Overheads
Paid
Delivery to
Customer
Credit Period
(Wait for
Customer
To Pay)
Profit
Order received Producti
on
complete
Goods delivere
d
& Bill Presente
d
£50 000 payment received
from custome
r
Weeks0
0000000Closing Bank Balance
0000000Total Payments
0 Rent
0 Advertising
0 Wages
0 Stock
0 General expenses
Expenses / Payments
0000000total receipts
0 capital introduced
0 Enterprise grant
0 loan
0 Sales revenue
Incomes / Receipts
000000opening bank balance
£££££££
TotalJun
May
Apr
Mar
FebJan
Cash flow forecast
Add up all the expenses
Add up all the incomes
Opening Balance = last month’s closing balance
Closing Balance = incomes – expenses +opening balance
-£1,000-
£1,000£850£1,500£150Closing Bank Balance
£17,000£4,850£3,150£3,650£5,350Total Payments
£4,000£2,000 £2,000Rent
£400£200 £200Advertising
£4,000£1,000£1,000£1,000£1,000Wages
£8,000£1,500£2,000£2,500£2,000Stock
£600£150£150£150£150General expenses
Incomes / Payments
£16,000£3,000£2,500£5,000£5,500total receipts
£2,000 £2,000 capital introduced
£1,000 £500 £500Enterprise grant
£3,000 £3,000loan
£10,000£3,000£2,000£3,000£2,000Sales revenue
Incomes / Receipts
£850£1,500£150£0opening bank balance
£££££
TotalAprMarFebJan
Cash flow forecast4. Opening Balance = last month’s closing balance
3. Closing Balance = receipts – payments +opening balance
1. Add up all the incomes
2. Add up all the expenses
Quick QuestionWhy would a bank want to see a persons cash
flow forecast before lending them money?
Why?Why?
Task 1Using the worksheet as your information
source complete the cash flow forecast.
Answer the questions.
Answers
Task 2Using the worksheet as your information
source complete the cash flow forecast.
Answer the questions.
Answers