Do now

• At the start of the month, a local retailer has an opening bank balance of:

-£1,200

Q1. What do you think this tells you about the business?

Q 2. W h y can y o u N O T say th ey m ad e a L O S S ?
 UNIT 2
GCSE BUSINESS –
5.5 – Cash and Cash Flow
Aims and Objectives
Specification Points
• One
• Two
• Three

Key Words and Terms

1.
2.
Inflow

3.
Outflow
Cash
Specification
Definition
• Cash – m
oney in the bank that is available right now

• Cash flow– the m

ovement of money in, around and out of a business
Sales and Revenue
• In b u sin ess, w h en y o u m ak e a sale o f a serv ice o r p ro d u ct th is is classed as
revenue

• However, this does not mean “money in the bank”

• Buy now, pay later
• Credit accounts
• Invoices raised only after the completion of work
• Buyers may cancel, return or not pay!
Cash flow - Example
• Big Clive is an electrician and he has just landed the
contract for a large office block renovation.

• He has estimated he needs to buy £12,000 worth of cable

and equipment to complete the job. He cannot do the job
without these items.

• When the job is completed, he plans to invoice the customer approximately £ 25, 000 to
be paid after work is complete

• However, he has recently spent a LOT of money on buying tat from Poundland for his
YouTube channel. He only has £2000 left in his bank account.

• What problems might Big Clive face? What impact will this have?
Cash flow - example
• On the face of it, Clive is doing well – he stands to make a £13, 000 profit on the job

•H o w ev er, th is is NOT cash in the bank – he hasn’t done the job or been paid

•H e faces an upfront bill of £12,000 to start the job and he only has £2,000 cash

•H e h as a cash flo w p ro b lem o f £ 10,000 an d th erefo re h e m ay :

• Have to find a form of short term borrowing (which costs money)
• Not be able to do the job at all and lose the income
• Potentially become insolvent
Difference
• This is why cash flowand revenue/profit are two different things

• To a business “cash is king” – if it has cash it can:

• Meet its obligations
• Grow
• React quickly to market changes and opportunities
• Compete strongly in the marketplace (potential for takeover /investment in other
business)

• In v esto rs w ill p ay clo se atten tio n to th e am o u n t o f cash a b u sin ess h as av ailab le

as a sign of its strength, value and ability to grow

• If a company arrives at a point where it doesn’t have any cash it is classed as “insolvent”
Task

1. Open “5.5 – Cash flowworksheet” fromthe shared area

2. Complete Task 1 o n ly
The importance of cash flow
•A football club is an excellent example
o f a b u sin ess th at m ay face cash flo w
p ro b lem s

• They only really have three main

“customers” which create cash inflow:
• Supporters
• S p o n so rs
• TV deals
•If an y o f th ese su d d en ly d isap p eared th ere w o u ld b e a h u g e red u ctio n in cash
inflow
Insolvency
• Alack of cash, or poor cash flowcan lead to insolvency as we have seen

• In so lv en cy is the inability of a company to pay their debts when required to do

so .

• S p ecifically, “Cash flow insolvency” means a business has assets or stock which could be
used to generate the cash to pay the debt, but they don’t actually have the liquid cash to
pay.
Insolvency
• Paperchase are an excellent
example of why it is important to
p red ict an d m an ag e cash flo w

• Their sales are very heavily biased

towards the end of the year

• If these sales don’t happen – there can

be serious cash flowproblems
Cash flow forecasts
• In o rd er to m an ag e th e cash a b u sin ess h as it w ill p ro d u ce a cash flow forecast

• This is another example, like break even, of a business using modelling

• Acash flowforecast will help to:

• Ensure there is enough cash available
• To plan ahead for months where income may be lower
• To plan for arranged borrowing/overdraft use
• To plan for potential issues with cash inflows and outflows
• To anticipate a potential lack of money in the business
Task
• Complete the cash flow summary using the word bank provided.
Exam Question
Do now

1. Cash inflows are…?

2. An example of a cash outflowmight be?

3. W h at is “N et C ash flo w ?”

4. An example of short term, temporary finance would be an…

?

5. Along termsource of finance would be…

?

6. Why is positive cash flow not profit?

7. Acashflowforecast could be used by a business to…

?

8. Give three ways in which a business could reduce their cash outflows
Cash flow forecasts
• Ultimately, the forecast is designed to tell us our “net cash flow” which is:
• Positive if we have enough cash in the business
• N eg ativ e if we will not have enough

• The form
ula is:

Net cashflow = All cash inflows – all cash outflows

Cash flow forecast
• Areal life forecast should be dynamic, meaning we can change inputs and observe the effect
on any outputs

• This helps us plan changes and see what the actual effect would be

•H o w ev er, as b efo re:

• All models are based on estimates or predictions
• Which make them not 100% reliable (nowhere near)
• Especially for a new business that has no previous data to work from
Cash Flow Forecast Example
Cash inflows Jan Feb Mar Apr May Jun Jul
Ticket sales £ 2,200,000 £ 1,750,000 £ 1,650,000 £ 1,650,000 £ 2,000,000 £ - £ -
TV Rights £ 8,000,000 £ 8,000,000 £ This section shows all of the
8,000,000 £ 8,000,000 £ 8,000,000 £ 8,000,000 £ 8,000,000
Sponsorship £ 3,000,000 £ 3,000,000 £ cash inflows – all the money we
3,000,000 £ 3,000,000 £ 3,000,000 £ 3,000,000 £ 3,000,000
Club shop £ 350,000 £ 490,000 £ 325,000 £ 400,000 £ 125,000 £
have coming IN. The total is
60,000 £ 50,000
Merchandise £ 67,500 £ 85,000 £ 90,000 £ 78,000 £ 30,000 £ 20,000 £ 20,000
shown underneath
In this Total inflows
example, £ 13,617,500 £ 13,325,000 £ 13,065,000 £ 13,128,000 £ 13,155,000 £ 11,080,000 £ 11,070,000
things look fine until June
and JulyCashwhere
outflows we begin
Jan toNet
face
Feb cash flow
cashflow is the difference
Mar Apr between
May Jun Jul
Wages problems.
£ 12,500,000 £ 12,500,000 £ 12,500,000 £ 12,500,000 £ 12,500,000 £ 12,500,000 £ 12,500,000
inflows and Opening
outflows. balance is the- cash we have
Marketing £ 100,000 £ 100,000 £ 100,000 £ 100,000 £ 100,000 £
There is potential for cash flow problems £ 350,000
Maintenance £ 350,000 £ This shows
350,000 £ us if in£available
350,000 any
Thisonesection
350,000 £particular
in 350,000
ourshows
business
£ account
all of
350,000 £the at the
350,000
to getLoan
outrepayment
of hand£ if we don’t
50,000 take
50,000 action
£ month we
£ will have
50,000 a50,000
£ cashcash £surplus
start
outflows ofor
50,000 –£the month.
all the
50,000money
£ 50,000
to address
Transport them£ – what 5,000 options
£
deficit. donot
4,000
It’s £ we 5,000 £
the whole 12,000 £
Closing
we story,
have
8,000 £
though,
balance
going is the
OUT. we cash
The
- £
we 25,000
have
total is at the
Kit £ 3,000 £ 3,000 £ 3,000 £ 3,000 £ 2,000 £ - £ 15,000
have? have to take the opening end of thebalance
month.
shown in toA positive amount is a
underneath
Utilities £ 25,000 £ 25,000 £ 25,000 £ 25,000 £ 17,000 £ 12,000 £ 12,000
Taxes £ 300,000 £ account to knowcash
300,000 £ the true
300,000 £ picture
surplus,
300,000 £ a negative is a cash deficit
300,000 £ 300,000 £ 300,000
Total outflows £ 13,333,000 £ 13,032,000 £ 13,033,000 £ 13,040,000 £ 13,027,000 £ 12,912,000 £ 13,302,000
and obviously indicates we have a cash
Net cash flow £ 284,500 £ 293,000 £ 32,000 £ 88,000 £ flow-£problem
128,000 1,832,000 -£ 2,232,000

Opening balance £ 800,000 £ 1,084,500 £ 1,377,500 £ 1,409,500 £ 1,497,500 £ 1,625,500 -£ 206,500

Closing balance £ 1,084,500 £ 1,377,500 £ 1,409,500 £ 1,497,500 £ 1,625,500 -£ 206,500 -£ 2,438,500
Cash Flow Forecast tasks
Create a cash flow forecast
• A digital marketing agency wants to produce a cash flow forecast for the next three months .
They charge commission for running advertising campaigns on popular social media
platforms.

• T h ey h av e cu rren tly secu red co m m issio n o f £ 8,500 fo r Jan u ary, b u t h av e lo st so m e

customers for Feb and March, costing approximately £2000 per month . They receive
payments of £1500 per month from sponsorship for their YouTube channel .

• They spend £400 per month on marketing, £600 rental on a small office, £250 producing
videos, £2,500 on wages for the two part time staff. Currently they are repaying a loan of
£20,000 at £250 a month.

• One member of staff has handed their notice in and will be leaving at the end of February,
this will save the company £1,250 per month

• In January, their bank balance was £4,450

Answer
January (£) February (£) March (£)
Cash inflows:
Commission
Youtube Sponsorship
Total inflows:
Cash outflows:
Wages
Rent
Marketing
Video Production
Loan Repayment
Total Outflow:

Net Cash Flow:

Opening balance
Closing balance
Answer
January (£) February (£) March (£)
Cash inflows:
Commission 8500 6500 6500
Youtube Sponsorship 1500 1500 1500
Total inflows: 10,000 8000 8000
Cash outflows:
Wages 2500 2500 1250
Rent 600 600 600
Marketing 400 400 400
Video Production 250 250 250
Loan Repayment 250 250 250
Total Outflow: 4000 4000 2750

Net Cash Flow: 6000 4000 5,250

Opening balance 4450 10,450 14,450
Closing balance 10,450 14,450 19,700
Exam Question
Exam Question
• 11,600
Homework
•H ig h stak es q u iz o n 5.5 – C ash an d C ash F lo w n ex t w eek .

• Revise the content you have learned in the last few lessons
Review
• You should now know:
• The meaning of cash and cash flow
• How to identify a cash inflow and a cash outflow
• The difference between revenue/profit and cash
• The reasons why cashflow forecasts are useful
• How to interpret and use a cash flow forecast
• How to perform simple calculations on a cash flow forecast .