1. Section 8 - Bromley Furnishings

2. Lesson objectives To be able to calculate, interpret and analyse cash flow forecasts To be able to recommend methods of dealing with forecast cash flow problems To be able to evaluate cash flow forecasts as a decision making tool To be able to answer quiz questions based on the case study

3. Starter Quick fire questions – have you ever borrowed money? Did you give it back? Why did you need it? How long did you borrow it for?

4. Sunil Narine Sunil Narine is a sole propreiter of the shop Bromley Frunishings He buys cushions from Holden plc The shop also sells curtains, curtain rails, and ornaments Sunil has prepared a cash flow forecast of his buinsess.

5. This is the cash flow forecast from the case study

6. Key terms Expenses – money paid out in cash (e.g. window cleaner) Income – money made in cash (e.g. cash sales) Opening balance – Money in cash tin at the start of the month carried over from previous month Closing balance – money in cash tin at the end of the month Cash flow forecast – the estimated flow of money in and out of a business of a period of time

7. Cash flow analysis In January Sunil is having a sale and so his “sales” figure is the highest. He makes a reasonable profit but needs to restock In February the sale has ended and in his normal trading he is only making a very small profit after paying out all of his expenses. Its too small to sustain the long-term viability of the business and pay him a wage. By March the sales have dropped off but the expenses remain high and as Sunil has not cut back on staff or stock then he makes a loss. He will continue to make a loss all year if he continues to trade in this way.

8. Complete the worksheet using the March data This will give you a whole year of forecasted cash flow for Bromley Furnishings

9. What happens if we create a year long cash flow for Bromley Furnishings?

10. If the same pattern of data is continued over a year, by December Sunil needs to borrow £24,500 a month just to stay in business. He needs to cut his expenses or raise his income.

11. How Bromley Furnishings should deal with their forecast cash flow problems 1.A bank overdraft, as the financing needs are flexible and probably short-term. If the capacity to borrow is only needed for a few months, this would be the cheapest form of finance by far 2.Reduce an expense – such as staff wages (lay someone off, close a couple of days a week) or switch to a cheaper supplier 3.Delay paying bills – he could delay bill paying to buy some time to make more cash

12. Is the march figure a problem? YES! the March figure is a problem for Bromley Furnishings Sunil may not be able to buy stock if he cannot pay his bills, Holden plc may refuse to supply him with cushions Sunil may go out of business if he runs out of cash, even if he is profitable Sunil may need to finance bad months with an overdraft in the short term or selling an asset like a van in the long term Sunil may not be able to buy stock if he cannot pay his bills, Holden plc may refuse to supply him with cushions Sunil may go out of business if he runs out of cash, even if he is profitable Sunil may need to finance bad months with an overdraft in the short term or selling an asset like a van in the long term NO! The March figure is not a problem for Bromley Furnishings This may be a normal trading pattern for this business His sales may pick up in April around Easter Its only a problem if he has several bad months This may only be a temporary problem This may be a normal trading pattern for this business His sales may pick up in April around Easter Its only a problem if he has several bad months This may only be a temporary problem

13. Problems with cash flow forecasts This is only a 3 month snapshot which is very short term to make any concrete decisions about the business. He really needs to make a year long cash flow. This is only a forecast – an estimate actual sales or expenses might be higher The price of goods sold may vary as he may further discount stock in his sale He may have overstated expenditure or understated income This is not about profit it is only about the cash in the business to meet his short-term debts. To get a full picture we would need to see his balance sheet and his profit and loss. Dangerous to make decisions about his business on just the cash flow forecast alone This is only a 3 month snapshot which is very short term to make any concrete decisions about the business. He really needs to make a year long cash flow. This is only a forecast – an estimate actual sales or expenses might be higher The price of goods sold may vary as he may further discount stock in his sale He may have overstated expenditure or understated income This is not about profit it is only about the cash in the business to meet his short-term debts. To get a full picture we would need to see his balance sheet and his profit and loss. Dangerous to make decisions about his business on just the cash flow forecast alone

14. Quiz on section 8 Who owns Bromley Furnishings? Is Bromley Furnishings part of Holden plc? What does the owner buy from Holden plc? What did the owner expect to take place between Jan and sept 2014? When is the owner planning a sale for?

15. Answers to section 8 quiz Sunil Narine No it’s a separate business Cushions Increase in sales New year 2015