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Cash It is essential to sustain a business.

It is important for trading purposes, buy stock, pay workers salaries, bills etc
Profitable business can fail due to lack of cash. It is also possible for business trade for many years without making any profit.

Harriet sets up a specialist mountain bike business. She rents a shop for $1,000/- a month- the first payment is due one month after taking up the lease. She buys 10 bikes on one months credit. Each bike cost $1,000/and is sold for $1,300/-. She sells all the bikes within the first 2 weeks, generating income of $13,000/- (and an initial profit of $3,000/-) Cash= ? Profit=? Stock=?

Towards the end of the 1st month she uses the $3,000/- profit to buy 3 more bikes, hoping to sell them quickly. Unfortunately, a competitor reduces its prices and Harriet finds that she cannot sell her bikes

Cash = ? Profit = ? Stock = ?

At the end of the month, Harriet is faced with 2 bills. She pays her supplier $10,000/- but no longer has the cash to pay her landlord. Cash=? Profit=? Stock=?

She has still (on paper) made $3,000/- profit. This profit is tied up in stock (the bikes) that she cannot sell. Unless the landlord is generous or she can find the rental money from elsewhere, then despite being profitable, Harriet has a cash flow crisis on her hands.

Cash flow statement A summary of the cash that has come into and out of the business over a period of time, showing: Where cash has come from (cash receipts) How it has been used (cash payments) Details what has happened, rather than what might happen in the future. Limited companies are required to publish cash flow statements with their annual accounts. It also include information about investing & financing activities of a company over a period of time. Helps users of financial statements evaluate a companys ability to have sufficient cash- both on a short run and on a long run basis. The statement of cash flows is useful to virtually everyone interested in the companys financial health: short-and long-term creditors, investors, management- and both current and prospective competitors

ALLISON CORPORATION Statement of Cash Flow For the year ended December 31, 2005 Cash flows from operating activities: Cash received from customers Interest and dividends received Cash provided by operating activities Cash paid to suppliers and employees Interest paid Income taxes paid Cash disbursed for operating activities Net cash flows from operating activities Cash flows from investing activities: Purchases of marketable securities Proceeds from sales of marketable securities Loans made to borrowers Collections on loans Purchases of plants assets Proceeds from sales of plant assets Net cash flows from investing activities

$870,000 $ 10,000
$880,000 $(764,000) $ (28,000) $ (38,000)

$(830,000) $ 50,000

$(65,000) $ 40,000 $(17,000) $ 12,000 $(160,000) $ 75,000 $(115,000)

Cash flows from financing activities: Proceeds from short-term borrowing Payments to settle short-term debts Proceeds from issuing bonds payable Proceeds from issuing capital stock Dividends paid Net cash flows from financing activities

$ 45,000 $(55,000) $100,000 $ 50,000 $ (40,000) $100,000

Net increase (decreases) in cash Cash and cash equivalents, Jan. 1 Cash and cash equivalents, Dec 31

$ 35,000 $ 20,000 $ 55,000

The cash flows shown in the statement are grouped into 3 major categories:
1) 2) 3)

Operating activities Investing activities Financing activities

Operating activities The operating activities section shows the cash effects of revenue and expense transactions. The operating activities section of the statement of cash flows include the cash effects of those transactions reported in the income statement.
Receipts and payments of interest are classified as operating activities.

Cash flows from operating activities include: Cash receipt Collections from customers for sales of goods and services Interest and dividends received Payments of interest Other receipts from operations; i.e: proceeds from settlement of litigation Payments of income taxes Other expenditures relating to operations; i.e: payments in settlement of litigation Cash payments Payments to suppliers of merchandise and services, including payments to employees

Investing Activities Cash flows relating to investing activities present the cash effects of transactions involving plant assets, intangible assets, and investment. They include: Cash receipts Cash proceeds from selling Investments and plant assets Cash proceeds from collecting principal amounts on loans Cash payments Payments to acquire investments and plant assets Amounts advanced to borrowers

Financing activities Cash flows classified as financing activities include the following items that result from debt and equity financing transactions: Cash receipts Proceeds from both shortterm and long-term borrowing Cash payments Repayment of amounts borrowed (excluding interest payments)Refer to repayment of loans Payments to owners, such as cash dividends

Cash received from owners (i.e: from issuing stock)

Cash and Cash Equivalents Cash is defined as including both cash and cash equivalents. Cash Equivalents: Short-term, highly liquid investments, such as money market funds, commercial paper, and treasury bills. Preparing cash flow statement. It is easier to prepare by examining income statement and the changes during the period in all of the balance sheet accounts except for cash.

Cash Flow forecast A way of constantly monitoring cash flow position. A plan of the expected movements of cash into and out of the business in the year ahead. Allowing managers to: Ensure enough cash is available to meet outgoings Plan how to finance any anticipated shortages of cash Cash flow forecast list: Cash inflows (Money coming in from sales and other source) Cash outflows (money being used to pay bills and other expenses)

Net cash flow The effect on net cash flow (inflow-outflow) on the businesss cash balances








Cash inflows
Sales Revenue Total cash in Cash outflows Water Electricity Raw Materials Wages Advertising Maintenance Office Equipment Premises rent Misc. expenses Total cash out 750 100 50 250 10 1160 340 0 340 800 100 50 250 10 1210 390 340 730 100 100 875 100 500 30 100 250 100 2155 (405) 730 325 1000 200 1000 50 250 200 2700 (700) 325 (375) 750 100 10 250 10 1120 380 (375) 5 100 100 550 100 10 250 10 1120 (20) 5 (15) 200 200 4725 700 1550 100 150 1500 340 9465 (15) 1500 1500 1600 1600 1750 1750 2000 2000 1500 1500 1100 1100 9450 9450

Net cash flow (+/-)

Opening balance Closing balance

May Cash inflows Start-up capital Sales revenue Total Receipts Cash outflows ? 5,000



1,000 1,000

? 1,200

Insurance Stock purchases Miscellaneous Rent Electricity Telephone 100 0 50 1,000 100 650 50 1,000 100 780 50 1,000 100 75

Marketing costs
Shop fittings Water Total payments Total receipts Total payments Net cash flow 3,150 5,000 3,150 ? 1,850 ?



? 1,000 ? ?

2,279 1,200 2,279 ?

Opening balance
Closing balance



Using the figures provided, complete 12-month cash flow forecast for Wolf Clothing Stores. Note: The first month will be a non-trading month (no-sales will be made, but all other relevant costs will still be incurred). Capital introduced: $15,000/- is invested in the business by the owners. Sales : Sales are estimated at $1,000/- in the first month , increasing by 35% each month thereafter. Insurance : $1,200/- is paid in equal instalments. Stock : Cost of purchase is 65% of sales. Loyalty discounts after 6 months will reduce this to 55% (i.e: from the 7th trading month) Miscellaneous : $25/- per month Rent : $1,000/- per month. The lat above the shop is rented out bringing in $450 per month additional income. Accountants Fee : $1,000/- annual fee, paid in first month . Electricity : $100/- per quarter (July, October, January, April) Telephone : $75/- per quarter (July, October, January, April) Vehicle costs : $200/- in the 1st month, $75/- per month thereafter.

Marketing costs Water Salaries


: 2% of sales for 1st 6 month increasing to 6% from the 7th trading month : $100 per quarter (July, October, January, April) : Since Wolf are operating as a partnership, they do not intend to pay themselves for the 1st 3 months . After this time, salaries will be equal 7% of sales. : $2,000/- in the 1st month

Cash flow forecasts enable businesses to identify cash shortages. If a business identifies a cash shortage, it can plan to avoid or manage situation.

Cash flow forecasts are only estimates. Sales may be lower than forecast or cost may be higher. A wide range of factors will affect the accuracy of the forecast.

Banks require cash flow forecasts to be It is impossible to forecast every item of prepared before they grant a business loan. This expenditure. ensures that the business will be able to pay back the loan and that it understands the importance of cash flow management. Using a cash flow forecasts, a business can plan The cash flow statement may reveal a problem expenditure based on a future cash surplus, or but may give little indication of the underlying delay expenditure to avoid a cash shortage. causes (although, at least, management will be aware of the problem) By completing a cash flow forecast , using a spreadsheet, the business can consider what ifs. The spreadsheet will automatically work out the cash implications of, for instance, offering customer longer credit period. Management must use cash flow forecasts as a working tool. Once a cash flow forecasts has been prepared, it should be monitored regularly and updated to take into account changing economic circumstances.

Cash forms a large part of working capital.

Working Capital: Amount of money available to fund the day-to-day running of a business.

It is calculated by comparing what a business owns with what it owes. Working Capital= Current Assets- Current Liabilities

A business needs to have more current assets than current liabilities to ensure that its short-term debts can be meet. A lack of working capital causes the same problems as lack of cash (remembering that cash is just one part of working capital). A business will be unable to meet its shortterm debts (i.e: paying for stock, or paying staff) and will face financial crisis.

Investing too much in fixed asset Holding to much stock Overtrading Seasonal fluctuations Giving too much credit Using too much credit Unexpected events

Chase debtors Cut cash outflow Debt factoring Delay payments Increase cash flow Overdraft Bank Loan Sale and leaseback Sell unused assets

Williams, J.R, Haka S.F, Bettner, M.S & Carcellon, J. V.2008. Financial&Managerial Accounting Thompson, R. and Machin, D. (2003). As Business Studies