LO: Have an in-depth understanding of cash flow and be able to apply this knowledge in preparation

and interpretation of cash flow forecasts.

SC for the chapter:

1. I can distinguish between profit and cash flow

2. I can explain the relationship between working capital cycle and cash flow forecast.
3. I can construct and interpret cash-flow forecasts
4. I can critically comment on the relationship between investment, profit, and cash flow
5. I can evaluate possible strategies for dealing with cash-flow problems

Read the text given and follow the sequence of notes to understand the topic better.

SC 1: Distinguish between profit and cash flow

Watch the video and answer the questions that follow, in your notebook.

https://youtu.be/hISdzmjNO5w

1. What is cash flow? What purpose does knowing the cash flow of a company serve the
entrepreneur?
2. What are the types of cash flow?

Difference between profit and cash flow (refer resources – self paced)

1. Research and find out what the following terms mean and what are their sources/ examples:
cash inflow and cash outflow.
2. Find out the formulas of the following: net cash flow; sales revenue; profit.
3. ‘It is possible for businesses to experience negative cash flow even when they earn a profit.
Similarly, it is possible for businesses to have positive cash flow but still experience a financial
loss.’ Validate this statement and give reasons/ statements to explain when and why these
situations can arise. List your points down very clearly.
4. What strategies can companies have in place to ensure that they do not face negative cash flow
situations?

Read this article Most NI businesses 'will run out of cash in six months' | UTV | ITV News and answer the
questions which follow:

1. In what way does furloughing staff help the cash position of the businesses?
2. What can governments do to help cash-strapped firms?

Attempt this test on the link https://forms.office.com/r/3syqn14PGe

SC 2: Understand the relationship between working capital cycle and cash flow forecast. (self- paced)

The working capital cycle

Watch the videos in the links given https://youtu.be/2yrI2sM8LhI

https://youtu.be/w-yFtdJ47Mk

https://youtu.be/MUy1aB6mQu4 and check your understanding.

1. What is working capital? Explain using examples and the formula.

2. Define the term working capital cycle?
3. Distinguish between current assets and current liabilities.
4. When do you think it is possible for companies to have a positive working capital but have a
negative cash flow?

SC3: I can construct and interpret cash-flow forecasts.

Read the material given:

Cash flow forecasting formulae

Cash Flow Forecast (CFF) is different from a Cash Flow Statement (CFS). A CFF is a prediction of the
cash flows in and out of a business over the foreseeable future. The CFS shows the actual cash inflows
and outflows for a specified time period.

Net cash flow = Total cash inflow – Total cash outflow

Closing balance = Opening balance + Net cash flow

Opening balance = Closing balance in previous month

Question 1

Explain two reasons why a new bakery business is likely to face liquidity problems in its first few months
of operation. [4 marks]

Question 2

The chief accountant of 360 Computers has compiled the following financial data: opening balance =
$50,000, total cash outflows = $120,000, and total cash inflows = $110,000. Calculate the closing balance
for 360 Computers. [2 marks]

Question 3

Ortega Football Academy’s cash flow forecast shows a closing balance of $80,000 at the end of this
month. Carlos, the finance director, then discovers that debtors of $12,000 have yet to be included and
there is an outstanding invoice of $18,000 that needs to be paid.

Calculate the closing balance for Ortega Football Academy. [2 marks]

Question 4

Refer to the figures below for excerpts from Tonina & Co.’s cash flow statement.

Opening balance: $135,500

Cash inflow: $532,500
Cash outflow: $352,500
a. Define the term cash flow statement. [2 marks]
b. Calculate Tonina & Co.’s net cash flow. [2 marks]
 c. Calculate Tonina & Co.’s closing balance. [2 marks]

Question 5

Complete the 3-month cash flow forecast for Mustang & Ford Winery. [4 marks]