CASH MANAGEMENT Cash Receipts and Payments CASH FLOWS

CASH MANAGEMENT Cash Receipts and Payments

CASH FLOWS • • • Life blood of a business Monitors surpluses Plan for shortfalls Plan for financing arrangements Allows planning of major purchases

TYPES OF CASH FLOWS • Regular cash flows – The majority – Take place every day, week, month, quarter or annually e. g. wages, suppliers, customers, taxation payments • Irregular – As the name implies don't happen on a regular basis e. g. Purchase of a non current (fixed) asset.

TYPES OF CASH FLOWS • Exceptional cash flows – When something is not predicted • For example Machinery breakdown • Variable and fixed – Variable – amounts may change although timescale may not e. g. Customer sales and receipts or supplier payments (30 days, etc. ) – Fixed will not e. g. Rent, unless there is a rent review

TYPES OF CASH FLOWS • Capital and revenue payments – Capital - payments for fixed assets – Revenue - day to day transactions – E. g. Purchase of a company van is capital but the servicing will be revenue • Capital and revenue receipts – Capital – cash injections into the business or share capital – Revenue – day to day receipts from trading.

TYPES OF CASH FLOWS • Activity 2 – page 49 • Payments that relate to the purchase of noncurrent assets would be A B C D Capital payments Regular revenue receipts Drawings Exceptional receipts

TYPES OF CASH FLOWS • Activity 3 – page 49 • Income received from an insurance claim for lost inventory would be classified as: A B C D Capital payments Regular revenue receipts Drawings Exceptional receipts

CASH BUDGETS • Example of cash budget proforma October £ Cash receipts Total receipts Cash payments Total payments Net cash flow for the month Opening balance Closing balance November £ December £

CASH BUDGETS • Example pro-forma page 50 • Example page 50 - 51

SALES RECEIPTS • Cash sales – In flow takes place at same time as sale • Credit sales – In flow takes place at some point in time after the sale – a LAGGED receipt (30/60 days) – Some customers do not adhere to terms! – Cash received in a month may contain proportions of sales from previous months.

Example Predicted Sales for the quarter October £ 680, 000 November £ 700, 000 December £ 750, 000 Of these, 20% are cash sales and the remainder on credit. Experience shows that the customers pay according to the following profile: Payment profile The month after the sale 20% Two months after the sale 50% Three months after the sale 30%

Example Sales from the previous quarter July £ 600, 000 August £ 560, 000 September £ 620, 000 Again, 20% are cash sales and the remainder on credit. We can start to prepare the cash budget! Cash budget – October to November Cash receipts: October £ November £ December £ 136, 000 140, 000 150, 000 Cash sales (20% of month sales)

Example Cash budget – October to November Cash receipts: October £ November £ December £ July sales 80%x 600, 000 x 30% 144, 000 August sales 80%x 560, 000 x 50% 224, 000 80%x 560, 000 x 30% 134, 400 September sales 80%x 620, 000 x 20% 80%x 620, 000 x 50% 80%x 620, 000 x 30% 99, 200 248, 000 148, 800

Example – contd. Cash budget – October to November Cash receipts: October £ November £ December £ October sales 80%x 680, 000 x 20% 108, 800 80%x 680, 000 x 50% 272, 000 November sales 80%x 700, 000 x 20% Cash from credit sales 112, 000 467, 200 491, 200 532, 800 Cash budget – October to November Cash receipts: October £ November £ December £ Cash sales 136, 000 140, 000 150, 000 Credit sales 467, 200 491, 200 532, 800

BAD DEBTS • Sales made on credit may result in bad debts • Some customers may never pay the debts that are due • These should be excluded from the cash flow forecast • Most businesses have an estimate of the percentage of sales that will turn bad • We factor these into the forecast • REMEMBER We reduce down the last month receipts by the % of bad debts.

BAD DEBTS • Business makes credit sales in month 1 • 30% pay the month following the invoice • The remainder pay two months after the payment date • There is a 5% rate of bad debts – Sales figure x 30% pay month 2 – Sales figure x 65% pay month 3

TASK • Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £ 320, 000 , September - £ 360, 000 and October - £ 400, 000. What are the cash receipts from credit sales in November? £ August sales September sales October sales Total November Receipts

TASK - Answer • Credit sales made with a payment pattern of 40% in the month following, 35% two months and 25% three months. Credit sales were August - £ 320, 000 , September - £ 360, 000 and October - £ 400, 000. What are the cash receipts from credit sales in November? £ August sales 320, 000 x 25% 80, 000 September sales 360, 000 x 35% 126, 000 October sales 400, 000 x 40% 160, 000 Total November Receipts 366, 000

STUDENT TASKS • • Example cash flow – page 52 Example cash flow with bad debt – page 53 Activity 4 page 54 Activity 5 page 55

PAYMENTS FOR PURCHASES • Work exactly the same as cash receipts! • We apportion the outflows according to our payment profile • These are known as LAGGED payments.

PAYMENTS FOR PURCHASES • Example page 56 • Activity 6 page 57 • Example page 57/58 – WATCH OUT in some cases purchase figures may be forecast based on gross profit margin (revision)

SETTLEMENT DISCOUNTS • Can be given for prompt receipt from customers • Can be received for prompt payment to suppliers • Will mean payments and receipts will be paid earlier • We reduce the in flow or out flow by the settlement discount amount • E. g. 2% settlement discount on £ 50, 000 of purchases means we will only pay 98% - £ 49, 000.

Example Sales for the quarter August sales £ 120, 000 September sales £ 100, 000 October sales £ 150, 000 A settlement discount of 2. 5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October? £ August sales September sales October sales Total October Receipts

Example Sales for the quarter August sales £ 120, 000 September sales £ 100, 000 October sales £ 150, 000 A settlement discount of 2. 5% is offered for payment in the month of the invoice and this is taken by 10% of customers, a further 50% pay the following month and the remaining 40% pay two months after the invoice date. What is cash in flow from credit customers in October? £ August sales 120, 000 x 40% 48, 000 September sales 100, 000 x 50% 50, 000 October sales 150, 000 x 10% x 97. 5% 14, 625 Total October Receipts 112, 625

OTHER PAYMENTS • Wages and salaries (example page 59/60) • Overheads (example page 60) • Interest receivable and payable (example page 62/63) • Loans – activity 8 page 64.

Student Tasks • Test your knowledge – page 70 • Test your learning – BPP p 47 and 48 • BPP Tasks Handout