1. Nursery Management Understanding and Managing Finance Session 6

2. The Cash Flow Statement  Cash is critical to the ongoing survival of an organisation - employees and suppliers will (sooner or later) require payment in “cash”  Traditional financial statements (Profit and Loss Account and Balance Sheet) do not necessarily highlight the cash- flow position  New Financial Standard (1991) required all except the smallest companies to publish Cash-Flow Statements  Cash-Flow Statement = Summary of all cash movements over a period of time

3. Balance sheet at the start of the accounting period Owner’s claim Cash Balance sheet at the end of the accounting period Owner’s claim Cash Cash flow statement Profit and loss account The relationship between the balance sheet, the profit and loss account and the cash flow statement

4. Equity Dividends paid Financing Capital expenditure Returns from investment and servicing of finance Taxation Management of liquid resources Operating activities Cash balance Elements of the Cash Flow Statement Inflows and Outflows

5. CASHFLOW STATEMENT STANDARD FORMAT Net Cash-flow from Operating Activities (Receipts from Cash sales and debtors less payments for stocks, wages, rent etc) +/- Returns from investment and servicing of finance (Receipts of interest etc less payments of interest and other fixed returns) +/- Taxation (Receipts of tax less payments of tax during the period) +/- Capital Expenditure (Receipts from sale of fixed assets less payments made to purchase fixed assets) - Equity Dividends paid (Payments of dividends to shareholders) +/- Management of liquid resource (Sale or purchase of disposable investments) +/- Financing (Input or redemption of long-term borrowings) = Increase or Decrease in Cash over Period These items must come exactly in this order They are + or - depending on whether the cash flows IN or flows OUT

6. CASHFLOW STATEMENT - EXAMPLE Net Cash-Flow from Operating Activities300,000 Returns from investment and servicing of finance100,000- Taxation 30,000- Capital Expenditure150,000- ----------- Subtotal 20,000 Equity Dividends paid 30,000- ----------- Subtotal 10,000- Management of liquid resource - disposal of investments 10,000+ Financing - additional long-term loan 50,000+ ----------- = Increase or Decrease in Cash over Period 50,000+

7. The Cash-Flow Activity  The Cash Flow Activity Spreadsheet describes one month in the life of ACME Paper Supplies. You are asked to use the information given to construct a Balance Sheet, a Profit and Loss Account and a Cash Flow Statement.  One of the Important elements here is to ensure that all of your statements agree.

10. This panel shows the effect of each transaction on the Balance Sheet.

11. The February Balance Sheet has been amended as a result of the transactions.

12. This panel shows the effect of each transaction on the Profit and Loss Account

13. The February Profit and Loss account has been constructed from the information in the previous slide. Compare Balance Sheets (Jan/Feb) (Retained Profit) Compare Balance Sheets (Jan/Feb) (Retained Profit)

14. The Cash-Flow Activity P and L v Balance Sheet The Balance Sheet shows:  January Retained profit:£56,000  February Retained profit:£60,500 This is an increase of £4,500 The P and L Account Shows: February Surplus:£4,500 The Profit Agrees

15. This panel shows the effect of each transactio n on the Cash Flow

16. The February Cash Flow has been constructed from the information on the previous slide. Compare increase in Bank on Balance Sheets (Jan to Feb) Tax demanded, but not paid!

17. The Cash-Flow Activity Cash Flow v Balance Sheet The Balance Sheet shows:  January Bank Balance:£10,000  February Bank Balance:£19,500 This is an increase of £9,500 The Cash Flow Statement shows: February Cash Inflow: £9,500 The Cash Agrees

18. Cash Flow Statement – A Summary  Shows how cash has been generated and where it has gone  A negative cash flow from operating activities may tell us that the business is trading unprofitably, or there may be other reasons (e.g. expansion requiring additional cash)  The subtotal after “Capital Expenditure” highlights the Cash Flows from ”normal” activities  The subtotal after “Equity Dividends” highlights additional external borrowings used to support trading  Note That: The Cash Flow Statement can be generated from figures incorporated in the P and L Account and this year’s and last year’s Balance Sheets

19. Net Cash-Flow from Operating Activities Probably the most important element on the Cash Flow Statement is the ‘Operating Activities’ This gives the cash flow summary of the day-to-day workings of the business. There are two ways that this can be calculated: The Direct Method: Analysing receipts, invoices and cash book transactions for the business over the period in question. The Indirect Method: This uses a combination of the information from the P and L account and Balance Sheets to deduce the Net Cash-flow from Operating Activities (See McLaney and Atrill - pages 154-158 for further examples)