2. Cash Flow – the sum of CASH payments into a business less the sum of CASH payments out Liquidation - when a firm ceases trading and its assets are sold for cash Insolvent - when a business cannot meet its short term debts Overtrading – expanding too rapidly without obtaining all the finance needed – resulting in a cashflow shortage CASHFLOW is a FORECAST – a prediction/estimate of what COULD happen! Importance of CashFlow? If a business doesn’t plan its cash in and cash out, it could run out of funds to pay suppliers/pay debts VERY important to business startups (so apply to the exam question!) – they need cash to be able to operate (shorter credit periods given) NOT the same as profit!! A business can be very profitable but have very little cash! This is due to credit purchases!

3. Cash In Owners own capital/savings Bank Loans Customers cash purchases Debtor (accounts receivable) payments Cash Out Expenses – rent/electric/labour costs/variable costs

4. Cash flow forecasts are prepared when: A new product or service is planned New resources (e.g. new machinery) is being bought A major sales campaign is planned There will be a large increase in existing activities, e.g. making or selling many more products.

5. A basic cash flow forecast Jan £ Feb £ Mar £ Apr £ May £ June £ Opening balance 5,000 7,000 4,000 6,00012,00015,000 Add inflows 20,00022,00018,00020,00023,00018,000 Total25,00029,00022,00026,00035,00033,000 Less outflows 18,00025,00016,00014,00020,00033,000 Closing balance 7,000 4,000 6,00012,00015,000 0

6. Causes of POOR cashflow... Lack of planning –not thinking ahead properly Poor credit control –not chasing debtors efficiently, not identifying bad debts Too much credit allowed –sometimes up to 3 months credit given to customers (to remain competitive) Expanding too quickly –Increase in wages and material costs months before cash received from extra sales –Could result in overtrading leading to severe cash shortfalls Unexpected events –Increase in costs – vehicles breaking down, customers becoming insolvent, lower competitive prices

7. Dealing with poor or negative cash flow Reducing or delaying expenditure Obtain cheaper supplies Rent or lease equipment rather than buying Delay payment of bill – extend credit period Try to get cash in more quickly from the sale of goods –Insisting on cash sale –Reducing payback period –Selling debts –Overdraft –Short term loan –Sell assets. You will need to consider the advantages and disadvantages for each of these!

8. How to improve cashflow? Reduce outflows! But how they do this has to be realistic – reducing labour or using cheaper labour can effect output and sales! Manage your Working Capital: –DEBTORS –CREDITORS –INVENTORY –CASH

9. Limitations of Cashflow... Not always accurate (estimate) –Incorrect assumptions on sales levels due to poor MR Uncertain external forces could affect forecast –Unexpected cost rises –Fluctuations in oil –Increase in interest rates Human error (lack of training)