About Cash Turnover is Vanity Profit is Sanity
About Cash Turnover is Vanity - Profit is Sanity Accounts Direct Academy of the dark arts & corporate know-how
About Cash Effect of cash control on business A business is only as healthy as its cash flow. There are times when a business might suffer from a cash flow reduction, such as when it purchases new equipment or if there was a catastrophic event and the company had to close for a period of time. But if a business is constantly struggling with its bottom line, this could create long-term problems from which it might not recover and needs to be addressed immediately that you notice these issues. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Flow Cash flow is the movement of money in and out of the business. Cash flow is money in from investors, Lenders, capital and profits. Cash flow out is money out from the business for wages, expenses and bills. Net cash flow is the difference between money in and money out Cash flows into the business as receipts - e. g. from cash received from selling products or from loans Cash flows out of the business as payments - e. g. to pay wages, supplies and interest on loans Profit and cash flow are two very different things. Accounts Direct Academy of the dark arts & corporate know-how
About Cash flow is simply about money coming and going from the business. The challenge for you is to make sure there is always enough cash to pay expenses when they are due, as running out of cash threatens the survival of the business. If a business runs out of cash and cannot pay its suppliers or workers it is insolvent so the owners must raise extra finance or cease trading. This is why planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Accounts Direct Academy of the dark arts & corporate know-how
About Cash Lets do a cash reconciliation A business can improve its cash flow by: Item Jan Feb Mar Opening bank balance £ 2, 000 £ 1, 000 £-1, 250 Total receipts (money in) £ 500 £ 750 £ 5, 000 Total spending (money out) £ 1, 500 £ 3, 000 £ 2, 000 Closing bank balance £ 1, 000 -£ 1, 250 £ 1, 750 Accounts Direct Academy of the dark arts & corporate know-how Reducing cash outflows - e. g. by delaying the payment of bills, securing better trade credit terms or factoring Increasing cash inflows - e. g. by chasing debtors, selling assets or securing an overdraft
About Cash Lets do a cash reconciliation At the beginning of January, the business has £ 2, 000 worth of cash. You can see that the total flow of cash into the business (receipts) for January is expected to be £ 500, and that the total outflow from the business (expenditure) is £ 1, 500. There is a net outflow of £ 1, 000 which means the projected bank balance at the beginning of February is only £ 1, 000. In February, there are expected payments of £ 3, 000 and only £ 750 of expected income. This means that the business is short of £ 1, 250 cash by the end of February and cannot pay its bills. An overdraft is needed to help the business survive until March when £ 5, 000 worth of payments are expected. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Common Courses of Cash Flow Problems - Expenses Exceed Income It is not uncommon for a business to operate at a loss for the first couple of years. Costs of starting a business normally exceed profits. However, if the business is more than three years old and it is still operating at a loss, a careful examination of expenditures is in order to ensure that money is not being spent needlessly or on the wrong things. It is also advisable to examine marketing and advertising methods to determine their effectiveness. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Common Courses of Cash Flow Problems -Prices A common business error is pricing products and services too low. Business owners often think that the lower the price, the more demand there will be for their product or service. However, if your price is too close to how much it costs to produce the product or service, it affects the profit margin. If sales are good but you still are not making enough to meet your financial obligations, try adjusting your prices. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Common Courses of Cash Flow Problems - Too Much Overhead Perhaps instead of 5 employees the business could run effectively with 3 or perhaps marketing and advertising campaigns are costing more than they are producing. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Common Courses of Cash Flow Problems - Paying Bills Early This seems contradictory to what we have been told, but it really isn’t - Pay all bills on time. You should still pay bills by their due date, but pay them as close to that date as possible. The longer you can keep that money in your account, the more positive your cash flow will be. Accounts Direct Academy of the dark arts & corporate know-how
About Cash Common Courses of Cash Flow Problems - Poor Collection Methods Slow-pay or no-pay customers can be a death knell for a business. If you are going to extend credit to customers, request at least three references and contact them. If you have slow-pay or no-pay customers, begin collection procedures as soon as they are late. If you delay trying to collect, it hampers your ability to collect. (Offering a discount to new customers to encourage prompt payment is not a bad idea, as long as the discount is not too deep. Discounts can cut into profits, leaving a reduced cash flow. ) Accounts Direct Academy of the dark arts & corporate know-how
About Finance A Quick Note about Finance - Ways to finance a business As part of or head of a firms accounting department, the subject of financing often comes up and you need to be aware of the basics as well as potentially being involved with raising or applying for finance especially if this is a (short term solution) to cash flow problems Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years. Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets (items it owns) that are no longer really needed to free up cash. External sources of finance are found outside the business, eg from creditors or banks. Short-term sources of external finance Accounts Direct Academy of the dark arts & corporate know-how
About Finance A Quick Note about Finance - Ways to finance a business – Short Term Short term sources of finance include overdrafts, trade credit and factoring. Long term sources of finance include owner savings, bank loans, debentures, mortgages, hire purchases and government grants Sources of external finance to cover the short term include: An overdraft facility - where a bank allows a firm to take out more money than it has in its bank account. Trade credits - where suppliers deliver goods now and are willing to wait for a number of days before payment. Factoring - where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount. Long-term sources of external finance Accounts Direct Academy of the dark arts & corporate know-how
About Finance A Quick Note about Finance - Ways to finance a business – Short Term A creditor is an individual or business that has lent funds to a business and is owed money. A debtor is an individual or business who has borrowed funds from a business and so owes it money. Be especially vigilant about businesses that are slow in paying creditors as they are using the money to finance expenditure (especially personal) and also debtors that are slow in paying There is a cost in borrowing funds usually as interest. Creditors provide loans to debtors who acquire assets and collateral to pay back interest to the creditors Creditors often ask for security before lending funds. This means sole traders and partners may have to offer their own house as a guarantee that monies will be repaid. A company can offer assets, e. g. offices as collateral. The type of finance chosen depends on the type of business. Start ups and small firms are considered very high risk and find it difficult to raise external finance. The only source of funds might be the owner's own savings, retained profits and borrowing from friends. Companies can issue extra shares to raise large amounts of capital in a rights issue Accounts Direct Academy of the dark arts & corporate know-how
About Finance A Quick Note about Finance - Ways to finance a business – Longer Term Sources of external finance to cover the long term include: • Owners who invest money in the business. For sole traders and partners this can be their savings. For companies, the funding invested by shareholders is called share capital. • Loans from a bank or from family and friends. • Debentures are loans made to a company. • A mortgage, which is a special type of loan for buying property where monthly payments are spread over a number of years. • Hire purchase or leasing, where monthly payments are made for use of equipment such as a car. Leased equipment is rented and not owned by the firm. Hired equipment is owned by the firm after the final payment. • Grants from charities or the government to help businesses get started, especially in areas of high unemployment. Accounts Direct Academy of the dark arts & corporate know-how
About Finance Always keep an eye on gearing ratios These basically measure the relationship between debt, cash flow, assets etc and are measure of how likely and when a company is going to become insolvent and crash Accounts Direct Academy of the dark arts & corporate know-how
About Cash Now do Knowledge Check 1 Accounts Direct Academy of the dark arts & corporate know-how
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