Cash Flow and Cash Flow Forecasts Part 1

Cash Flow and Cash Flow Forecasts Part 1 GCSE Business Studies Cash flow Click here for Part 2 Click here for

Cash Flow and Cash Flow Forecasts GCSE Business Studies Cash flow Part 1 What they are…. Why they matter…. Who uses them….

Outcomes: GCSE Business Studies Cash flow All will be able to define Cash Inflows and Cash Outflows. Level 1 Grade E Knowledge skills. Most will be able to Level 2 explain the concept of Net Grades D to C – Cash Flow. Explanation Skills. Some will be able to Level 3 advise actions that should Grades B to A* be taken having studied a Advising Skills. Cash Flow Forecast.

Starter – The concept of cash movements! DECEMBER S S M T W T F 1 2 BANK £ 60 0 £ 7 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 GCSE Business Studies Cash flow 31 • Imagine it is December 1 st • You have £ 70 in your bank account on Dec 1 st • In the first 2 weeks of December, you SPEND £ 60 on presents for your friends • On Christmas Day, your favourite auntie gives you £ 50 as a gift and your elder sister gives you £ 50. You put this £ 100 in the bank as soon as you can NOW USE THIS INFORMATION TO ANSWER THE FOLLOWING QUESTIONS ….

Starter – The concept of cash movements! Q 1. What will your bank balance be at the CLOSE of December? £ 110 Q 2. What was your OUTFLOW of cash in the month? £ 60 Q 3. What were your INFLOWS of cash in the month? £ 100 GCSE Business Studies Cash flow Q 4. If your “Net Cash Flow” is found by INFLOWS minus OUTFLOWS of cash, what was your NET CASH FLOW in December? + £ 40 Q 5 What is your bank balance at the OPENING of January (Jan 1 st)? £ 110 Show answers

Starter – The concept of cash movements! £ 50 DECEMBER S S M T W T F 1 2 BANK £ 60 0 £ 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 GCSE Business Studies Cash flow 31 • Imagine it is December 1 st • You have £ 30 in your bank account on Dec 1 st. You have an overdraft limit of £ 50 on your account • In the first 2 weeks of December, you SPEND £ 60 on presents for your friends • On Christmas Day, you get no money as gifts – everyone bought you a present NOW USE THIS INFORMATION TO ANSWER THE FOLLOWING QUESTIONS ….

Starter – The concept of cash movements! Q 1. What will your bank balance be at the CLOSE of December ? - £ 40 Q 2. What was your OUTFLOW of cash in the month ? £ 70 Q 3. What were your INFLOW of cash in the month ? Nil GCSE Business Studies Cash flow Q 4. If your “Net Cash Flow” is found by INFLOWS minus OUTFLOWS of cash, what was your NET CASH FLOW in December ? £ 70 Q 5 What is your bank balance at the OPENING of January ( Jan 1 st)? - £ 40 It’s a good job you had an overdraft set up on your bank account! Show answers

A Cash Flow Table…. . Using Example 1 December CASH INFLOWS Income from chores. ZERO Income from gifts. £ 100 TOTAL INFLOWS (A) £ 100 CASH OUTFLOWS Spending on others. £ 60 GCSE Business Studies Cash flow Spending on self. ZERO TOTAL OUTFLOWS (B) £ 60 Net Cash Flow for month (C): ( found by A MINUS B) £ 40 Opening Bank Balance (D) Start of month) Closing Bank Balance ( End of month). Found by (C) plus (D) ( £ 70 £ 110 January February

A Cash Flow Table…. . Using Example 2 December CASH INFLOWS Income from chores. ZERO Income from gifts. ZERO TOTAL INFLOWS (A) ZERO CASH OUTFLOWS Spending on others. £ 70 Spending on self. ZERO GCSE Business Studies Cash flow TOTAL OUTFLOWS (B) £ 70 Net Cash Flow for month (C): ( found by A MINUS B) Opening Bank Balance (D) Start of month) Closing Bank Balance ( End of month). Found by (C) plus (D) (-£ 70) ( £ 30 (-£ 40) OVERDRAWN ! January February

Cash Flow Forecasting If a person or a business wants a clearer picture of when their best and worst months for cash are, they will try and ESTIMATE their monthly inflows and outflows of cash. They use the cash flow table to help them. GCSE Business Studies Cash flow RESULT- the cash flow forecast – tells you which months you may need help from your bank with an overdraft. Let’s have a go at a cash flow forecast for January using example 1….

Activity – January Cash Flow Estimate • Imagine it is JANUARY 1 st. • You have £ 110 in your bank account on Jan 1 st. • By January 31 st, you ESTIMATE you will have earned £ 20 for doing chores around the house. FILL THIS IN ON THE CASH INFLOWS. • In the first 2 weeks of January, you ESTIMATE that you’ll SPEND £ 60 on a birthday present for your mom. FILL THIS IN ON THE CASH OUTFLOWS. GCSE Business Studies Cash flow • You also ESTIMATE that you’ll spend £ 50 on yourself on clothes. FILL THIS IN ON THE CASH OUTFLOWS. NOW USE THE INFORMATION YOU HAVE ADDED TO THE CASH FLOW CHART TO WORK OUT and FILL IN: (A) The predicted NET CASH FLOW for January. (B) The predicted CLOSING BANK BALANCE for January ( and therefore the opening bank balance for February )….

Estimating January - Cash Flow Table …. . Using Example 1 December January ZERO 20 £______ Income from gifts. £ 100 ZERO TOTAL INFLOWS (A) £ 100 20 £______ £ 60 60 £______ ZERO 50 £______ £ 60 110 £______ February CASH INFLOWS Income from chores. CASH OUTFLOWS Spending on others. Spending on self. GCSE Business Studies Cash flow TOTAL OUTFLOWS (B) 90 ) (-£______ Net Cash Flow for month (C): ( found by A MINUS B) Opening Bank Balance (D) Start of month) Closing Bank Balance ( End of month). Found by (C) plus (D) ( £ 40 ( a minus because outflows are more than inflows) £ 70 £ 110 20 £______ Show answers

Quick check …. What are cash inflows ? What are cash outflows? GCSE Business Studies Cash flow How do we find NET CASH FLOWS for a month ? a) How do we find the closing bank balance for a month? b) How can we decide what the opening bank balance is for the following month?

Quick check …. • In a minute, we are moving on to ESTIMATE your cash flow forecast for February. GCSE Business Studies Cash flow • As you only have £ 20 in the bank at the start of February, what FINANCIAL advice do you think a good business person or a bank manager would give you about your cash flow situation in February? Advice could include …. Watch your spending! Try and do more chores to earn more money! Get a part time job around school !

Activity – February Cash Flow Estimate • Imagine it is FEBRUARY 1 st • You have £ 20 in your bank account on Feb 1 st. • By February 29 th, you ESTIMATE you will have earned £ 30 for doing more chores around the house. FILL THIS IN ON THE CASH INFLOWS. • In the first 3 weeks of January, you ESTIMATE that you’ll SPEND £ 60 on a birthday present for your dad. FILL THIS IN ON THE CASH OUTFLOWS. GCSE Business Studies Cash flow • You also ESTIMATE that you’ll spend £ 10 on yourself on hair care. FILL THIS IN ON THE CASH OUTFLOWS. NOW USE THE INFORMATION YOU HAVE ADDED TO THE CASH FLOW CHART TO WORK OUT and FILL IN: (A) The predicted NET CASH FLOW for FEBRUARY. (B) The predicted CLOSING BANK BALANCE for FEBRUARY ( and therefore the opening bank balance for MARCH )….

Answers February - Cash Flow Table …. . Using Example 1 December January February ZERO £ 20 Income from gifts. £ 100 ZERO TOTAL INFLOWS (A) £ 100 £ 20 £ 60 ZERO £ 50 £ 60 £ 110 £ 70 £ 40 ( a minus because outflows are more than inflows) £ 70 £ 110 £ 20 (-£ 20) CASH INFLOWS Income from chores. £ 30 ZERO £ 30 CASH OUTFLOWS Spending on others. Spending on self. GCSE Business Studies Cash flow TOTAL OUTFLOWS (B) Net Cash Flow for month (C): ( found by A MINUS B) Opening Bank Balance (D) Start of month) Closing Bank Balance ( End of month). Found by C plus D (-£ 90) ( (-£ 40) Show answers

Activity – Summer Cash Flow Estimates • Imagine it is June 1 st. GCSE Business Studies Cash flow • Use the information provided on the cash flow forecast to fill in and interpret the missing figures.

Completing summer - Cash Flow Table…. . Activity 3 June July August CASH INFLOWS Income from chores. £ 10 £ 30 £ 10 ZERO £ 10 £ 30 20 £______ ZERO £ 60 £ 40 Spending on self. ZERO £ 20 £ 30 TOTAL OUTFLOWS (B) £ZERO £ 80 70 £______ Net Cash Flow for month (C): ( found by A MINUS B) 10 £______ ( a minus because OUTFLOWS ______ are more than inflows) £ 70 £ 80 30 £______ 80 £______ 30 £_______ (-£ 20) Income from gifts. TOTAL INFLOWS (A) CASH OUTFLOWS GCSE Business Studies Cash flow Spending on others. Opening Bank Balance (D) Start of month) Closing Bank Balance ( End of month). Found by (C) plus (D) ( 50 (-£______ ) (-£ 50) Show answers

Summer Cash Flow Activity – Questions for you to answer … 1. Based on your answer for the closing bank balance in August, what would you advise this person to ensure they have set up on their bank account BEFORE August? GCSE Business Studies Cash flow 2. What advice might you give them about their cash planning situation for SEPTEMBER?

Summary: GCSE Business Studies Cash flow • A Cash Flow Forecast is a table where a person or business tries to forecast/ estimate their inflows and outflows of cash over a period of months. • This helps them identify where they need support from a bank with an overdraft facility AND • It shows times where there is plenty of spare cash which could then be put in to an interest earning savings account.

GCSE Business Studies Cash flow Questions - Use of Cash Flow Forecasts…. 1. Why will the owner of a business want to have a cash flow forecast? 2. Why will they compare their ACTUAL cash flows each month with their estimated cash flow forecast? 3. Why will a bank want to see a cash flow forecast before they decide whether or not to grant an overdraft or bank loan? 4. Why might a potential investor want to see a cash flow forecast for a company ?

Cash Flow and Cash Flow Forecasts GCSE Business Studies Cash flow Part 2 Cash Flow Forecasts in a business context ….

Outcomes: GCSE Business Studies Cash flow All will be able to Group Cash Inflows and Cash Outflows for a business. Level 1 Grade E Knowledge skills. Most will be able to Level 2 complete a cash flow Grades D to C – forecast and interpret it. Application and Interpretation Skills. Some will be able to advise Level 3 problems with cash flow Grades B to A* forecasting and discuss Advising Skills. why stakeholders will be interested to see them.

Match the definition to the key term… GCSE Business Studies Cash flow Key term Definition 1. CASH INFLOWS Net Cash Flow plus opening Bank Balance tells you this…. 2. Cash outflows Bank balance at the start of a month ( same as closing balance of the previous month!) 3. Net Cash Flow Cash Income coming in to a person or business 4. Opening Bank Balance Cash Inflows MINUS Cash Outflows 5. Closing Bank Balance Cash spent by a person or business Click and drag the correct definition to match the key term

CASH INFLOWS to a business compared to the CASH OUTFLOWS… 1. Vehicle Expenses e. g. fuel GCSE Business Studies Cash flow 2. Sales Turnover ( or Revenue) Click the boxes, once for inflow, twice for outflow Cash inflow/ outflow OUTFLOW INFLOW 3. Stock Purchases OUTFLOW INFLOW 4. Credit Notes from Suppliers OUTFLOW INFLOW 5. Energy Costs OUTFLOW INFLOW 6. Insurance OUTFLOW INFLOW 7. Share Capital ( or Owners Capital) OUTFLOW INFLOW 8. Bank Loan Received OUTFLOW INFLOW 9. Monthly repayments and interest on Bank Loan. OUTFLOW INFLOW 10. Government Grant OUTFLOW INFLOW 11. Wages and salaries paid to staff. OUTFLOW INFLOW 12. Rent. OUTFLOW INFLOW

Put these stages of working out a Cash Flow for a month in the best order…. … First A) Add NET CASH FLOW to the opening bank balance to find the closing bank balance for the month. B) ADD up ALL Cash INFLOWS for the month. GCSE Business Studies Cash flow C) Take Cash OUTFLOWS away from total cash INFLOWS to find the NET CASH FLOW for the month D) ADD up all Cash OUTFLOWS for the month. E) Write the closing bank balance for the current month in to the box for the OPENING bank balance of the NEXT month. Last B, D, C, A, E Reveal answer

Activity – A Business Cash Flow • We are going to look at an example of a completed Cash Flow Forecast for 3 months of a business. GCSE Business Studies Cash flow • We are then going to check we can complete and interpret some cash flows. • Note – need word document worksheet for this task called “CASH FLOW WJEC ACTIVITY”.

Discuss our answers… GCSE Business Studies Cash flow • Explain why you think Cathy’s purchases of materials and energy costs rise quite a bit in December compared to October and November. • Fully explain what you think the difficulties and problems might be when businesses try and do cash flow forecasting. • Why might using spreadsheet software help a business create a Cash Flow Forecast? • If when a business compares its ACTUAL cash flow with its cash flow forecast, the cash flow forecast is constantly UNDERESTIMATING the amount of cash INFLOWS, what advice would you give the business about what it should do with its Cash Flow Forecast Table?