Transcript Improving cash flow

Pages 66-69
To appreciate the purpose of consumer
protection laws & apply them to
business

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To understand the main
aspects of financial
management as a means of
managing cash flow more
effectively.
To analyse ways of
increasing cash inflows and
reducing cash outflows
To appreciate the purpose of consumer
protection laws & apply them to
business

Cash is vital to a business’s success and
includes notes, coins and money in the bank.
Cash flow is:
The flow of money coming into
and going out of a business
Cash Inflows: the cash coming into a business
Cash from
the
individual
Loan from
the bank
Cash
payments
from sales
Cash outflows
Cash going out of a business
Equipment &
Wages & training
Advertising
Stock
Telephone, gas,
electric & other
bills
Interest
on loans
Maintenanc
e & repairs
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
Net cash flow is the money left over when a
business takes its outflows from its inflows.
In other words, NET CASH FLOW IS:
the receipts of a business minus its payments
Example: If Nestle have £30,000 per month coming
in and pay out £10,000 in costs, their NET CASH
FLOW is £20,000.
Costa Coffee
In pairs, list the cash inflows and cash outflows
that Costa Coffee may have
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Cash inflows
Payments from customer
Interest on bank accounts,
savings & investments
Franchise fees, royalty
payments etc
Merchandise
Receipt of bank
loans/overdrafts

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Cash outflows
Purchase of stock, raw
materials or tools.
Wages, rents and daily
operating expenses.
Purchase of fixed assets PCs, machinery, office
furniture, etc.
Loan repayments.
Dividend payments.
Income tax, corporation
tax, VAT and other taxes.
Reduced overdraft
facilities.
‘Deliberately changing monetary
values like cash flows to achieve
financial objectives’
Increasing
sales
revenue
Long term
solutions
Cash flow
e.g. loans
Improving
C.F from
customers
Destocking

Sales revenue = Selling price x quantity sold
Main ways to boost sales revenue:
1. Improved marketing: Using alternative or
additional forms of advertising or product trials
2. Better products: Introducing new or
differentiated products to the marketplace
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Reducing stocks of finished products (possibly
having a sale to shift stock surpluses).
1.
2.
3.
Reduce trade credit
Chase up late payments
Employ a factor
(A Factor is a financial company, often a bank that will
advance the money owed to a business by its
customers)
What longer term solutions are there to
improving cash flow?
Solutions: Bank loan, issue shares (PLC’s) or sale of
assets.
Reduce your
orders for
materials &
stock
Lease rather
than buy
Delay paying
invoices
Improve
&
reduce
outflows
A inflow and smaller cash outflows over a period of
time
B inflow and smaller cash inflows over a period of
time
C outflow and smaller cash inflows over a period of
time
D outflow and smaller cash outflows over a period
of time.
A improved cash flow because more raw
materials will
be ordered
B improved cash flow because fewer raw
materials will be ordered
C improved cash flow because fewer finished
products will be sold
D a deterioration in cash flow because more
finished
products will be sold.
Answer B
A Increasing the amount of materials bought from
suppliers
B Increasing the level of stocks of raw materials
held by the business
C Reducing the length of time customers are
given to
pay their invoices
D Reducing the amount of time taken by the
business to pay its suppliers
Answer C
1.
2.
3.
4.
5.
What is meant by the term ‘financial management’?
What is the difference between a cash inflow and a cash outflow?
Give three examples of cash inflows to a business.
Explain the purpose of de-stocking.
Identify and explain one long term solution that might improve a
firm’s cash flow.
6. Outline three possible ways that cash flows out of a business.
7. What is meant by the term ‘factor’?
8. If a firm has a positive cash flow does this mean it is making a
profit?
9. How might changing the order levels of materials affect a
business?
10. ‘Delaying the payment of invoices is good for the cash outflow.’
Explain what is meant by this and how it may affect a business.
1.
2.
3.
4.
5.
What is meant by the term ‘financial management’?
What is the difference between a cash inflow and a cash outflow?
Give three examples of cash inflows to a business.
Explain the purpose of de-stocking.
Identify and explain one long term solution that might improve a
firm’s cash flow.
6. Outline three possible ways that cash flows out of a business.
7. What is meant by the term ‘factor’?
8. If a firm has a positive cash flow does this mean it is making a
profit?
9. How might changing the order levels of materials affect a
business?
10. ‘Delaying the payment of invoices is good for the cash outflow.’
Explain what is meant by this and how it may affect a business.
Revision Q: Answers
1. Financial management is the deliberate action of changing monetary variables to
achieve financial objectives, such as improved cash flows.
2. A cash inflow is cash coming into a business. A cash outflow is cash moving out of
a business.
3. Any three from the following (receiving): sales revenue; interest received from
savings; returns on other investments; sale of assets; money paid by debtors; rental of
land or buildings; any other relevant answer.
4. One way a business can increase its cash inflow is to make a conscious decision to
reduce its stocks of finished products by selling them off, known as de-stocking. Often
it takes the form of a sale where the finished goods are offered at reduced prices to
customers for a limited period. This usually results in customers buying more and an
increase in revenue.
5. One of the following: bank loans – taking out a loan from a bank o other similar
institution to inject capital into a business; issuing shares – selling shares in the
business to investors in return for capital; selling assets – selling machinery, buildings
or land that is not needed; sale and leaseback – selling machinery, buildings or land
then leasing them back to raise a lump sum.
6. Any three from the following (paying for): raw materials; wages and salaries; rent;
interest on loans; electricity or gas; VAT; corporation tax; any other relevant answer.
7. A factor is a financial company, such as a bank, that advances the money that a business is
owed by its customers immediately and charges a fee for its services. A firm can typically get up
to 90% of the value of invoices by using a factor.
8. Cash flow is not the same as profit. Cash flow is the amount of money flowing into and out
of a business over a given period of time whereas profit is the amount of money that is left over
after the total costs have been subtracted from total revenues over a given period of time
(usually a year). It is possible that businesses can have cash flow problems but still be a
profitable venture. A positive cash flow simply means more money has flowed into the business
over a period of time than has flowed out. It says nothing about overall costs and revenues,
however.
9. The order levels that a business places add to the cash outflow. By changing the amounts
that are ordered the level of cash outflow can be directly affected. Reducing the levels ordered
will clearly reduce any cash outflow. Cutting order levels will, however, have an effect on the
production quantities that a firm enjoys. The fewer raw materials ordered will result in lower
production quantities. Clearly this is a strategy that can only be used if the sales levels are falling
as well. There could be an argument that if a firm is overproducing then this strategy could also
be employed to bring production levels in line with sales volumes, leading to efficient working
practices such as Just-In-Time.
10. One way in which a business can improve its cash outflow is by delaying any payment on
invoices due. This is where a firm does not pay its invoices on time, for example after 30 days.
The longer it can be delayed the better the cash flow position as there will be less cash flowing
out of the business.
It can, however, have a negative effect on the reputation of a firm as one that does not