Unit 3 Personal Business Finance Here are some

Unit 3 Personal & Business Finance Here are some of the terms we will use in this presentation, can you work out what they are? PRICE SET money coming into the business MAN TYPES money going out of the business ASCOT REF making predictions into the future ABLE CAN what is left in the bank Mr. Barry Year 12 Business BTEC Learning Aim E

Cash flow forecasts • Tries to predict in advance what and when these cash flows will be • Having a healthy cash flow is crucial to the survival of a business • A healthy cash flow means that a business will have enough cash at any one point in time to be able to meet demand for short term cash outflows Mr. Barry Year 12 Business BTEC

Benefits • By forecasting cash flow in advance, a business can identify where there might be shortages and either try to prevent this from happening or put plans in place to deal with it. TOP TIP KEY TERM Cash flow forecast – a document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months. Mr. Barry Year 12 Business BTEC Formulas used in this topic will not be given to you in the examination. It is therefore important that you learn them

Key terms • Cash flow – The movement of money in and out of a business • Cash inflow – Money that flows into the business – Receipts • Cash sales • Receipts from earlier credit sales • Cash outflow – Money that flows out of the business – Purchases • Cash purchases • Payments for earlier credit purchases Mr. Barry Year 12 Business BTEC Can you explain what is meant by credit sales and credit purchases?

Cash inflows and cash outflows Cash inflows/ receipts • Where does money flowing into a business come from? – When starting up? • • Entrepreneur’s own savings Investment from family and friends Issuing shares if a company Bank loan – When expanding? • Bank loan • Further investment from shareholders – On a day to day basis? • Sales of goods and services (Credit & Cash) • Sales of assets • Bank interest received Mr. Barry Year 12 Business BTEC

Cash inflows and cash outflows Cash outflows • Where does money go when it flows out of a business? – When starting up? • Purchase of assets • Purchase of stock – When expanding? • Additional assets • Further Administration expenses – On a day to day basis? • • • Mr. Barry Purchases (Cash & Credit) Value Added Tax (VAT) Bank interest paid Rent & Rates Utilities Year 12 Business BTEC Use your earlier knowledge of this unit to give examples of cash outflows.

Worked Example Mr. Barry Year 12 Business BTEC

Cash flow forecasts • Cash Flow Forecasts – A record of all the cash flowing into and out of the business – Shows opening balance at start of each month and closing balance at end – Normally produced monthly but can be any time frame e. g. weekly • Opening Balance – amount of cash available in a business at the start of a set time period, for example a month • Closing Balance – amount of cash available in a business at the end of a set time period, for example a month If the closing balance at the end of January is £ 1500 what is the opening balance for February? Mr. Barry Year 12 Business BTEC

Example 1 Mr. Barry Year 12 Business BTEC

Important • You will need to learn the formula to calculate the closing balance: Opening balance + cash inflows – cash outflows = closing balance Mr. Barry Year 12 Business BTEC

Credit period • Is the length of time given to customers to pay for goods or services received • Credit periods affect the ability of the business to gain credit from its suppliers. • If a business can secure supplies on credit, then this will slow down the flow of cash out of a business. • The longer the credit period, the later the cash flows out. Some businesses can secure credit periods of 30, 60 or even 90 days. Mr. Barry Year 12 Business BTEC

Credit period • If a business both sells on credit to its customers and buys on credit from its suppliers, it needs the first to have a shorter credit period than the second Mr. Barry Year 12 Business BTEC

Key terms • Liquidity – measures a firm’s ability to meet short-term cash payments. • Insolvent – when a firm is unable to meet short-term cash payments. Mr. Barry Year 12 Business BTEC

• The opening balance at the start of the year will be a true reflection of the business’s bank balance, whereas the closing balance will be based upon the predicted incomes and expenditures over the period of the cash flow forecast, normally a year. • One of the key purposes of the cash flow forecast is to highlight, in advance any months where there is a risk of a negative cash flow, as this allows the business to make arrangements • For example, a prearranged overdraft with the bank – or to try to take actions to avoid this Mr. Barry Year 12 Business BTEC

• A business with a negative closing balance is often said to have liquidity problems and is in danger of becoming insolvent. • In the next section on cash flow management, you will look in more detail at methods available to try to avoid these negative closing balances Mr. Barry Year 12 Business BTEC

Figure 3. 4 illustrates a sample cash flow forecast for the first four months of a sole trader. Can you memorise the layout? Please take note of each section and how to calculate closing balance Mr. Barry Year 12 Business BTEC

Use of cash flow forecasts for planning, monitoring, control and target setting • A cash flow forecast can help to identify where there are potential shortfalls but might also indicate where there are large amounts of cash left at the end of a month or year. Although you may think this is a good thing, if the cash balance at the end of each month is high, it might be an indication that the business is not taking advantage of opportunities. • For example, could it use this cash surplus to improve or expand the business? • Cash flow forecasts are just that, a forecast, and therefore the actual cash flow of the business should be monitored alongside the forecast to see if inflows and outflows are as expected, better or worse. Mr. Barry Year 12 Business BTEC

Problems within the cash flow forecast • Problems occur with cash flows when the business’s outflows are greater than the opening balance plus the inflows, as this will result in a negative closing balance. • This means that the business will not have enough cash to meet payments that are due. Mr. Barry Year 12 Business BTEC

Solutions to cash flow problems • Can you think of any solutions for a business struggling with cash flow problems? 5 minutes End Mr. Barry Year 12 Business BTEC

Solutions 1. Overdraft arrangements 2. Negotiating terms with creditors 3. Reviewing and rescheduling capital expenditure End Mr. Barry Year 12 Business BTEC

Application Mr. Barry Year 12 Business BTEC

Benefits and limitations of cash flow forecasts • Can you research some potential benefits and limitations of cash flow forecasts? 5 minutes End Mr. Barry Year 12 Business BTEC

Benefits and limitations of cash flow forecasts Mr. Barry Year 12 Business BTEC