Learning objectives Understand key aspects of financial management Understand how to analyse the difference between increasing cash inflows and reducing cash outflows

Cash flow Movement of money into and out of a business It is important that there should always be some money in the bath!

Inflow or Outflow Rent Bank loan Raw materials Insurance Advertising Debtors Electricity Wages (per hour) Owners Funds Sales revenue Wages (per product )

FINANCIAL MANAGEMENT A Business has some control over its finances. It can within limits change its inflows and outflows. This is known as financial management

Duxton is a manufacturer of pet food. It has its own range of pet foods that it supplies to small independent retailers and garden centres, mainly through wholesalers. However, much of its output goes to large supermarket chains as own label products. Duxton uses financial management to achieve its financial objectives. The top managers at Duxton decided 12 months ago that the economy was going into recession. They were afraid this would affect their cash flow. Why? Customers could stop buying pet food and this would reduce the cash inflows to the business. If cash outflows did not reduce by the same then the company could get into serious financial difficulty. HELP! What could they do? Increase cash inflowsReduce cash outflows

TASK – IMPROVING CASH INFLOWS Increasing sales revenue De-stocking Improving cash flow from customers (Debtors) Ordering Stock Delay paying invoices (creditors) Long term solutions – Bank loan – Selling shares – Asset sale Complete worksheet

Increasing sales revenue Sales revenue = selling price x quantity Increase revenue: Increase selling price Increase quantity sold Or a combination of both Improve marketing Better products

DE-STOCKING Result : Customers buy more and there is an increase in monthly sales During the month of the sales, cash inflows increase Having a one-off sale - selling off stocks of products at a reduced price

Improving cash flow from customers- debtors Have a rigorous system in place to deal with late payers. Invoices sent out to customers chasing up payment. Receive payments sooner improving inflows. Reduce the time given to customers. Instead of giving customers 6 months to pay, reduce this down to 4 months. Cash inflows improve, however, you could lose customers as they buy off a competitor who gives them a longer period. Use a factor company - A financial company that will advance the money that a business is owed by its customers. It will advance the company usually 85% immediately improving the cash inflows but the factor will charge a few usually 5% of the total debt.

Long term solutions A bank loan - A large one-off inflow. This would mean the net cash flow going forward month to month would be larger than it would otherwise have been. However, the loan has to be repaid with interest. This would incur an increase in outflow each month Issue new shares - investors pay cash for shares. The cash is a cash inflow to the business Asset sale – selling off any assets that are no longer used. Cash inflows to the business.

Improving cash outflows Controlling stocks Delay paying invoices Lease rather than buy Complete worksheet

Order for new materials and stock Order fewer materials, however, may not have enough stock when needed. A strategy normally used when dealing with a fall in sales. Use materials and stock more efficiently – reducing waste Introduce a JIT system

Delay paying invoices Businesses buys raw materials and stock from other businesses and may be given 30, 60 days to pay the invoices. The longer the business can delay paying their invoices the longer the delay in outflows improving their cash flow. However, delaying payments too long can be risky as the supplier may refuse to sell the company in products until the invoice is paid. Some businesses offer discounts for early payment. A business who delays payment will lose out on the discount.

Lease rather than buy Purchasing an asset incurs a large initial outflow. Leasing would involve much smaller outflows over a period of time However, the business would never own the asset.

Complete Atif’s cash flow and answer questions Computer tasks

Task Over to you case study

Plenary Multi choice worksheet