Cash Flow

The difference between profit and cash flow AO2

Working capital AO2, A04

Assessment
objective Cash flow forecasts AO2, AO4

Liquidity position AO2

Cash Flow forecasts A02, A04

The relationship between investment, profit and cash A02

flow

Strategies for dealing with cash flow problems AO3

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What is the difference between

cash
& profit?

Aren’t they both money???

 1.
CA$H
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○ Current Asset
○ Money a business actually receives
from the sale of goods and services.
○ “Cash in hand” or “Cash in the bank”
○ Needed to pay for daily costs
 2.
PROF!T
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○ Positive difference between total

revenue & expenses.
○ Any sales made beyond break-even
point counts as profit.
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#think
1. Why do businesses allow customers to buy on credit?

2. What are the effects of this?

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○ Paying by credit allows customers to buy

now and pay later.

Credit ○ Can cause cash flow problems (no immediate

payment until a month later)

○ Profit is made before cash is received.

○ A business cannot operate without sufficient

cash to pay its suppliers, employees etc.
 You own an iStore. 11

1. Faris phones the store and places an

order for a new iphone.
2. In turn you place an order for the
Example iphone with your suppliers and pay
cash for it.
3. Your supplier delivers the iphone to
your store 3 weeks later.
4. You phone Faris and tell him his
phone has been delivered. You send
him an invoice and wait for him to
pay.
5. Once he has paid he can come in
and collect it.
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Working Capital Cycle

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Cash or liquid assets (funds) available to pay for the daily

running expenses of a business.
Working Capital

Liquidity*** assets that can be converted to cash quickly.

Largest cause of business failure is insufficient working

capital.
Current Assets
-
Current Liabilities
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Working Capital CASH PRODUCTION

Cycle COSTS

SALES

● Most businesses have a delay between paying for costs of production (materials, wages, etc.) & being paid
for the product
● This requires working capital to be carefully managed
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Cash Flow Forecast

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CASH FLOW FORECAST = A financial tool used to show the expected

movement of cash into and out of a business, for a given period of time.

CASH FLOW STATEMENT = The financial document that records the actual
cash inflows and cash outflows of a business during a specified trading period,
usually 12 months.

***Note: the cash flows that you will find for your IA business
will be cash flow statements NOT cash flow forecasts.
Cashflow

● The transfer or movement of money into

and out of an organization.

● Businesses must plan this timing in order

to meet its financial obligations, fund
growth, and STAY in business.
Net Cash Flow [inflow - outflow]

● The sum of cash payments to a business

(inflows) less the sum of cash payments
made by it (outflows).

● Insolvent: When a business cannot

meet its short-term debts.
Example
Structure of Cash-Flow Forecast
● OPENING BALANCE (closing balance for previous period)

● Section 1: CASH INFLOW

• Cash sales, payments for credit sales, capital injections

● Section 2: CASH OUTFLOW

• Wages, materials, rent, and other costs/expenses

● Section 3: NET CASH FLOW

[Inflow - outflow]

● CLOSING BALANCE
[opening balance + net cash flow]
 Steps to follow:
Step 1 - Determine from the text what your OPENING BALANCE is for month 1.

Step 2 - Write out all the INFLOW amounts for every month and TOTAL them.

Step 3 - Write out all the OUTFLOW amounts (expenses/costs) for every month and TOTAL them.

Step 4 - Calculate your NET CASH FLOW (Total Inflow - Total Outflow) ***negative amounts are represented in (brackets)

Step 5 - Calculate your CLOSING BALANCE (Opening Balance + Net Cash Flow)

Step 6 - Your closing balance for month 1 will become your OPENING BALANCE for month 2 and your closing balance for
month 2 will become your OPENING BALANCE for month 3 etc...

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Activity #1
 Practice Activity #2
Nicole is planning to open a perfume boutique. Given the following information, construct a cash
flow forecast:

- She has $10,000 from her personal bank account that she wishes to deposit at the beginning of
August
- She estimates that the first four months of revenue will be: $4000, $4800, $6000 and $8100
- The expenditure of buying the perfumes is expected to cost: $2000, $2160, $$2700 and $3645
- Anticipated advertising expenditure: $1600 the first month and $900 each month after that
- Nicole intends to hire five members of staff who will each each a salary of $800/month
- Other costs include rent and utilities which total $550/month

Complete the cash flow statement & Examine the company's financial position

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○ KAHOOT!
 BUSINESS
MANAGEMENT

The relationship between investment, profit and cash

flow
 BUSINESS
MANAGEMENT
Investment, profit and cash flow

Best case financial outcome Worst case financial outcome

○ When managed well, a firm is ○ When managed poorly, a firm

likely to meet its long-term will struggle and eventually
objectives as its growth have to cease trading.
strategies are underpinned by
healthy finances.
 Consistent positive
net cash flows lead
to healthy liquidity

Best case Healthy liquidity

Consistent profits
financial eventually lead to
allows for investment
into fixed assets to
outcome consistent positive net
cash flows
maintain/increase
output

Consistent (or better)

levels of output
generate consistent
profits
 Consistent
negative net cash
flows lead to a
poor cash
balance

Reduced
A poor cash
Worst case productivity leads
balance prevents
to reduced
financial a firm from
profits or even
making ongoing
outcome losses, which
investments into
causes negative
fixed assets
net cash flows

Lack of ongoing
investment into
fixed assets results
in reduced
productivity
 BUSINESS
MANAGEMENT

Strategies to deal with cash flow problems

Common causes of cashflow problems BUSINESS
MANAGEMENT
Common causes of cash flow problems

Overtradin Over- Over- Poor Unforesee

g by borrowing stocking credit n changes
accepting leading to
with control from the
more orders using more by external
more
than it has cash offering environme
the capacity inflows to inventory too many nt.
to financially repay than the customer
handle. loans and business s trade
interest can sell. credit,
charges. long
Overtrading at a
nail salon
Supply chain
disruptions in
2022
 BUSINESS
MANAGEMENT
Liquidity crisis at Hong
Kong Airlines
○ Hong Kong Airlines (HX) has
been struggling with cash flow
problems since 2018.
○ Watch this video and:
1. Identify the strategies used by
HX to improve its liquidity
position.
2. Explain whether HX can
continue using these strategies
indefinitely.
3. Other than the strategies
identified from the video, what
else can HX do to improve its
working capital position?
 BUSINESS
MANAGEMENT
Methods of reducing
cash outflows

○ Seeking preferential credit

terms
○ Seeking alternative
suppliers
○ Better stock control
○ Reduce expenses
○ Leasing rather than buying
 BUSINESS
MANAGEMENT
Methods of increasing
cash inflows

○ Tighter credit control

○ Accepting cash payments
only
○ Changing pricing policy
○ Improving the firm’s
product portfolio
 BUSINESS
MANAGEMENT

Seeking additional
sources of finance

○ Additional sources of finance appropriate

for a liquidity crisis include:
◦ Overdrafts
◦ Selling fixed assets
◦ Debt factoring
◦ Government assistance
◦ Additional sources of finance will
increase cash inflows into the
business.