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Cashflow

Cashflow. Higher Business Management. Cashflow Management. Cashflow management is all about the movement of money (cash) in and out of a business Cash and cash management are the most important aspects of business Without cash the business will fail

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Cashflow

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  1. Cashflow Higher Business Management Cashflow – DH Jan 11

  2. Cashflow Management • Cashflow management is all about the movement of money (cash) in and out of a business • Cash and cash management are the most important aspects of business • Without cash the business will fail • A lack of cash is one of the most common reasons for business failure (especially new businesses) Cashflow – DH Jan 11

  3. CASH IN Profits Sale of fixed assets Sale of stock Decreases in debtors Capital introduced Loans received Increases in creditors CASH OUT Losses Purchase of fixed assets Purchase of stock Increases in debtors Drawings or dividends paid Loans repaid Decreases in creditors Cash Movement Cashflow – DH Jan 11

  4. Positive and Negative Cashflow Cashflow – DH Jan 11

  5. Liquidity • The ability to have access to cash or near cash assets • This allows the organisation to meet their everyday commitments • The more liquid an organisation the better able it is to pay off short-term debts Cashflow – DH Jan 11

  6. Cashflow Statement • The Cashflow Statement is NOT the same as a Cashflow Forecast • It is historic, whereas a forecast/budget is based on future cashflow • PLCs must provide a Cashflow Statement by law • Small organisations are NOT required to publish cashflow statements, but are encouraged to do so • Cashflow Statements show the sources and uses of cash during a financial period • The purpose is to reconcile the increase/decrease in cash with the profit/loss for that year Cashflow – DH Jan 11

  7. Sources of Cash Flow Problems • Tying up too much cash in stock • Allowing customers too much credit • Customers not paying within agreed credit terms • Borrowing too much finance at high interest repayments • Owners taking too many drawings • Purchase of capital items (e.g. equipment) • Low sales Cashflow – DH Jan 11

  8. How to Improve Cash Flow • Offer discounts and promotions to encourage cash sales and reduce stock levels • Sell any unnecessary fixed assets • Encourage overdue customers to pay their bills • Arrange credit with suppliers • Seek another source of finance • Owners draw less • Purchase cheaper raw materials • Purchase items on hire purchase Cashflow – DH Jan 11

  9. Questions • Identify 4 sources of cash flow problems and justify one solution for each source you have identified. (2005, Section 2, Q5d) (8 marks) 2. Distinguish between a Cash Budget and a Cashflow Statement. (2 marks) Cashflow – DH Jan 11

  10. Solutions • Identify 4 sources of cash flow problems and suggest one solution for each source you have identified. (2005, Section 2, Q5d) (8 marks) Cashflow – DH Jan 11

  11. Solutions • Distinguish between a Cash Budget and a Cashflow Statement. (2 marks) • A Cashflow Statement is a historical document, whereas a Cash Budget looks at future income and expenditure. • A Cashflow Statement must be produced by PLCs by law, conversely a Cash Budget is not a legal requirement. • A Cashflow Statement is for external purposes, however a Cash Budget is for internal use. Cashflow – DH Jan 11

  12. Questions • Explain why firms can have a healthy profit but experience cash flow problems. (2007, Case Study, Q5a) (4 marks) • Describe the term liquidity. (2 marks) Cashflow – DH Jan 11

  13. Solutions • Explain why firms can have a healthy profit but experience cash flow problems. (2007, Case Study, Q5a) (4 marks) • Too much money tied up in stock • Unwillingness to borrow due to high interest rates • Owners take large drawings from profits • Customers taking too much time to pay • Customers allowed too much time to pay • Allowing customers to have a high credit limit • Difficulty in raising finance • Purchasing large amounts of Fixed Assets (high capital expenditure) Cashflow – DH Jan 11

  14. Solutions • Describe the term liquidity. (2 marks) • The ability to have, or have access to, sufficient cash, or near cash assets • Purpose is to meet the everyday commitments of running an organisation • It is vital for the short-term survival of the organisation • Ability of current assets to meet current liabilities • A "liquid" stock is a stock with a lot of volume that is easy to buy and sell Cashflow – DH Jan 11

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