1. Cash flow
THE TIMES 100

2. What is cash?
Cash is notes, coins and bank deposits that provide firms with the spending power to pay their bills and expenses

3. Cash flow
Cash flow refers to the flows of cash both into and out of a business
Cash inflows are payments into a firm from customers or other sources
Cash outflows refer to payments made by a business
Net cash flow=cash inflow–cash outflow

4. Cash flow forecasting Cash inflows result from:
Cash sales from customers
Payments from debtors
Cash from other sources such as bank loans
Cash outflows result from:
Paying overheads such as rent & wages
Paying for raw materials & other variable costs

5. Cash flow forecasting A cash flow forecast will include:
Cash inflows (receipts)
Cash outflows (payments)
Net cash flow (inflows minus outflows)
Opening balance (this is the same as the closing balance of the previous period)
Closing balance (opening balance combined with net cash flow)

6. Cash flow forecasting Jan Feb March April May June Cash inflows
£17,000
£18,500
£19,000
£19,800
£21,000
£18,900
Cash outflows
£14,300
£15,100
£24,900
£16,300
£17,800
£24,800
Net cash flow
£2,700
£3,400
(£5,900)
£3,500
£3,200
Opening balance
£2,200
£4,900
£8,300
£2,400
£5,900
£9,100
Closing balance

7. Importance of cash flow forecasting
To identify periods of cash shortfall so action can be taken to deal with this
To identify periods of cash surplus so expenditure can be planned
To secure additional funding, for example, from a bank

8. Consequences of cash flow problems
If a firm does not have the cash to pay its debts:
Relationships with suppliers may deteriorate
Workers may leave
It may have to cease trading
In the short-term CASH is considered to be more important than PROFIT

9. Causes of cash flow problems
Poor planning
External factors e.g. the credit crunch
Inadequate credit control
Holding excessive stock
Investing too heavily in fixed assets
Overtrading – expanding quicker than available funds allow

10. Improving cash flow In simple terms, cash flow can be improved by:
Increasing, or speeding up, cash inflows
Decreasing, or slowing down, cash outflows

11. Methods of improving cash flow
Increase & speed up cash inflows
Decrease & slow down cash outflows
Overdraft or bank loan
Delay paying creditors
Debt factoring
Delay unnecessary capital spending
Sale of assets or ‘sale & leaseback’
Lease rather than buy
Shorten credit terms for customers & chase up debts
Reduce spending on expenses e.g. negotiate lower rent

12. Do not confuse cash and profit
Cash v profit
Do not confuse cash and profit
The receipt of cash may not coincide with an associated sale, for example:
An item may be bought on credit and paid for at a later date
A bank loan may be taken out causing a positive cash flow, but no sales have been made

13. Cash flow in context

14. Fill the gaps January February March Cash inflow £10,000 £11,000 ?
Cash outflow
£9,000
£11,500
£10,800
Net cash flow
£1,000
£400
Opening balance
£1,600
£1,100
Closing balance
£1,500
Jan opening balance = £600
February net cash flow = (£500)
March cash inflow = £11,200
What are the missing figures?
Use the CIMA case study to help you

15. Controlling cash
Management accountants deal with a range of issues related to controlling cash in organisations. Give examples of these activities. Use the CIMA case study to help you
Examples include:
Ensuring sufficient cash is available for investment by not tying up cash in stock unnecessarily
Putting procedures in place for chasing up outstanding debt
Controlling different levels of cash outflows in relation to the size of the business

16. Managing cash shortfalls
Trained management accountants will forecast when there may be possible cash shortfalls and have strategies in place to deal with these. What might a business do if a possible shortfall has been forecast, to ensure it can pay its creditors? Use the case study to help you.
Borrow money e.g. Arrange a larger overdraft or take out a short term loan
Improve cash flow by making better use of assets, negotiating payments with suppliers or offering discounts to customers for early payments

17. Effective forecasting
Organisations operate within dynamic business environments so management accountants must take a range of external factors into account when forecasting cash flow. Give examples of changes that may affect cash flow forecasts. Use the CIMA case study to help.
Examples include:
Tastes change
Suppliers increase prices
Interest rates go up or down
The economy moves through the business cycle

18. Useful resources
Cash flow lesson suggestions and activities (The Times 100)
CIMA case study (The Times 100)
CIMA website