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Cash flow

Cash flow. THE TIMES 100. Cash is notes, coins and bank deposits that provide firms with the spending power to pay their bills and expenses. What is cash?. Cash flow refers to the flows of cash both into and out of a business

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Cash flow

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  1. Cash flow THE TIMES 100

  2. Cash is notes, coins and bank deposits that provide firms with the spending power to pay their bills and expenses What is cash?

  3. Cash flow refers to the flows of cash both into and out of a business • Cash inflows are payments into a firm from customers or other sources • Cash outflows refer to payments made by a business • Net cash flow=cash inflow–cash outflow Cash flow

  4. Cash inflows result from: • Cash sales from customers • Payments from debtors • Cash from other sources such as bank loans Cash outflows result from: • Paying overheads such as rent & wages • Paying for raw materials & other variable costs Cash flow forecasting

  5. A cash flow forecast will include: • Cash inflows (receipts) • Cash outflows (payments) • Net cash flow (inflows minus outflows) • Opening balance (this is the same as the closing balance of the previous period) • Closing balance (opening balance combined with net cash flow) Cash flow forecasting

  6. Cash flow forecasting

  7. To identify periods of cash shortfall so action can be taken to deal with this • To identify periods of cash surplus so expenditure can be planned • To secure additional funding, for example, from a bank Importance of cash flow forecasting

  8. If a firm does not have the cash to pay its debts: • Relationships with suppliers may deteriorate • Workers may leave • It may have to cease trading In the short-term CASH is considered to be more important than PROFIT Consequences of cash flow problems

  9. Poor planning • External factors e.g. the credit crunch • Inadequate credit control • Holding excessive stock • Investing too heavily in fixed assets • Overtrading – expanding quicker than available funds allow Causes of cash flow problems

  10. In simple terms, cash flow can be improved by: • Increasing, or speeding up, cash inflows • Decreasing, or slowing down, cash outflows Improving cash flow

  11. Methods of improving cash flow

  12. Do not confuse cash and profit The receipt of cash may not coincide with an associated sale, for example: • An item may be bought on credit and paid for at a later date • A bank loan may be taken out causing a positive cash flow, but no sales have been made Cash v profit

  13. Cash flow in context

  14. What are the missing figures? Use the CIMA case study to help you Fill the gaps

  15. Management accountants deal with a range of issues related to controlling cash in organisations. Give examples of these activities. Use the CIMA case study to help you Controlling cash

  16. Trained management accountants will forecast when there may be possible cash shortfalls and have strategies in place to deal with these. What might a business do if a possible shortfall has been forecast, to ensure it can pay its creditors? Use the case study to help you. Managing cash shortfalls

  17. Organisations operate within dynamic business environments so management accountants must take a range of external factors into account when forecasting cash flow. Give examples of changes that may affect cash flow forecasts. Use the CIMA case study to help. Effective forecasting

  18. Cash flow lesson suggestions and activities (The Times 100) • CIMA case study (The Times 100) • CIMA website Useful resources

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