CHAPTER: 30

CASH FLOW 02nd June,2023

1. The cash flow of a business is the cash inflows and outflows over a period of time.
2. Cash inflows are the sums of money received by a business during a period of time. It includes cash sales, rent
received, interest received, sale of assets, putting more money by shareholders, money received from debtors.
3. Cash outflows are the sums of money paid out by a business during a period of time. Cash purchases, rent paid,
interest paid, buying of noncurrent asset.
4. A cash flow cycle shows the stages between paying out cash for labour, materials, and so on, and receiving cash
from the sale of goods.
5. Profit is the surplus after total costs have been subtracted from revenue. TR-TC
6. A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually on a month-by-
month basis.
7. Net cash flow is the difference, each month, between inflows and outflows.
8. Closing cash (or bank) balance is the amount of cash held by the business at the end of each month. This
becomes next month’s opening cash balance.
9. Opening cash (or bank) balance is the amount of cash held by the business at the start of the month.
10. Working capital is the capital available to a business in the short term to pay for day-to-day expenses.
Current Asset-Current Liabilities

Past Paper Questions

1. Explain how a business might improve its cash flow. [5] 11/Oct/2022
2. Discuss how a business could solve cash flow problems. 12/Oct/2013 [12]
3. Explain why a new business should be more concerned about cash flow than making a profit. 11/May/2015 [8]
4. Discuss why a new business should focus more on managing its cash than making a profit. 11/May/2018 [12]
5. Discuss the view that a new business should be more concerned with cash flow than with profit. [12]
6. Analyse the advantages and disadvantages for a new business of using an overdraft to help manage its cash
flow. 11/May/2015 [8]
7. Discuss the view that cash flow forecasts for a new international airport may be of limited use to its senior
managers. 13/Oct/2017 [20]
8. Explain how better management of trade receivables and trade payables can improve cash flow. 12/Feb/2020
9. Explain the effects on a business of having a high level of working capital. 12/Feb/2021

Importance of cash flow forecasting

1. Analyse the benefits for a new business of producing a cash flow forecast. 12/Feb/2019 [8]
2. Discuss the importance of cash flow forecasting to a new car hire business. 12/Oct/2020
3. Explain the importance of cash flow forecasts to a newly established business. 12/Oct/2013 [8]
4. Explain the usefulness to a new business of cash flow forecasts. 12/May/2011 [8]
5. An accurate cash flow forecast is the most important financial document for a clothing retailer when
planning to enter a new market.’ Discuss the extent to which you agree with this view. 11/May/2021
6. Analyse the benefits to a business of using a cash-flow forecast. [8] 11/Oct/2022

Importance of cash flow forecasting

Identify expected shortfalls in cash balances in advance – if the forecast shows a negative cash balance
then the business needs to ensure it has a sufficient bank overdraft facility.
See whether the trading performance of the business (revenues, costs and profits) turns into cash. Helps
prevent early business failure.
Makes sure that the business can afford to pay suppliers and employees. Suppliers who don't get paid
will soon stop supplying the business; disputes will arise if employees are not paid on time.
Spot problems with customer payments – preparing the forecast encourages the business to look at how
quickly customers are paying their debts. However, this is not really a problem for businesses (like
retailers) that take most of their sales in cash/credit cards at the point of sale.
As an important part of financial planning – the cash flow forecast forces the owner to think about likely
revenues and costs in advance.

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External stakeholders such as banks may require a cash flow forecast. Certainly, if the business wants a
bank loan, the bank will want to see the CFF as part of the business plan.
Analyse whether the business is achieving the financial objectives set out in the business plan.

Q: Discuss why a new business should focus more on managing its cash than making a profit.

Cash flow is the movement of cash in and out of a business over time. – Profit is the difference between
sales revenue and costs.
– Cash flow is a significant short-term financial factor and a major cause of business failure in small
businesses – it needs to be carefully managed. – A business needs to maintain liquidity. – A business
can become insolvent even though it is profitable because of timing problems between cash inflows
and cash outflows. – Cash is a vital short-term need – profit can be a longer-term objective.
– A small business may over-trade – expand too rapidly and hit short-term cash/liquidity problems

Cash flow is critical for new businesses.

It is common for profitable businesses to run out of cash.
It is vital to have sufficient cash in the short term – profit may have to wait for the long term.
It is important that the distinction between cash and profit is recognised by the business.
New businesses are often given much less time to pay suppliers, given shorter credit periods.
Banks and lenders will require quick and agreed time repayment.
Finance may be difficult for new businesses to obtain, so they need to build up their own cash reserves.
So, cash flow management is critical for new business survival.
The process of generating revenue requires cash, so especially for a new business, cash is more important than
profit.
• A focus on cash in the early days of a new business may well lead to profit in the long run.

An accurate cash flow forecast is the most important financial document for a clothing retailer when planning
to enter a new market.’ Discuss the extent to which you agree with this view. 11/May/2021
EVALUATION A candidate should make a judgement as to the extent to which an accurate cash flow forecast is the
most important financial document for a clothing retailer when planning to enter a new market.
The context is a clothing retailer.
Are other financial documents as/more important than a CFF?
Does the business need an injection of finance to allow them to move into a new market?
All financial documents have a purpose/usefulness. It is likely that all financial documents will be important in
making such a move, but the cash flow forecast will give some idea of the cash flow outcomes of the
new market but not the overall profitability.
It might depend on what the new market is: is it a new geographical market, a new market in terms of demographic
e.g. from clothing for children to adult clothes; from clothing for women to clothing for men.
A lot could depend on how different the new market is from the one the business currently operates in

Explain the effects on a business of having a high level of working capital. 12/Feb/2021
Working capital is current assets minus current liabilities. Also called net current assets.
Capital needed to pay for raw materials, day-to-day running costs. Ability to offer credit offered to customers.
Ability to offer more prompt payment to suppliers. Is the lifeblood of the business, needed day-to-day. Without
enough working capital, the business will be illiquid/unable to pay debts.
Less reliance on overdrafts/short-term borrowing. High level of working capital can be a disadvantage due to
opportunity cost.
Too much capital tied up in inventories, payments receivable (goods sold on credit), idle cash.
Results in opportunity cost decisions.
(Money) could be used to make more money for the business.
Money could be used elsewhere e.g. invested on fixed assets.
There may be advantages and disadvantages for a business having a high level of working capital – it may not be
high enough or it may be too high.

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Q Explain two ways SMR could overcome its cash-flow problems.
 Negotiate longer credit terms with suppliers / delay payment of bills [k] for ingredients for snacks [app]
to keep cash in the business for longer [an]
 Overdraft [k] would allow the business to have a negative cash balance for a while [an] for this
snack/food business [app]
 Asking customers to pay earlier / offering discounts to encourage quicker payments / insisting on cash
sales [k] would allow business to receive cash inflow sooner [an]
 Bank loan [k] as this would increase cash inflow [an]
 Reduce level of stock bought [k]
 Increase number of customers [k] could increase cash inflows [an]
 Delay / cancel purchases of capital equipment / sell surplus non current assets [k]
 Find cheaper suppliers [k]

Particulars July Aug Sept Oct Nov Dec

Opening Balance 10,000 ? ? ? ? ?
Cash Sales 8,000 8,000 15,000 4,000 35,000 16,000
Cash Purchases 6,000 25,000 5,000 11,000 25,000 6,000
Net Cash Flow ? ? ? ? ? ?

Closing Balance ? ? ? ? ? ?
Particulars January February March April May June
Opening Balance 100
Cash Sales 50 150 350 400 800 900
Cash Purchases 20 50 150 600 1200 100
Net Cash Flow ? ? ? ? ? ?

Closing Balance ? ? ? ? ? ?

Particulars Oct Nov Dec Jan Feb March

Opening Balance 1500
Total Sales 500
Credit Sales 400
Total Purchases 800
Cash Purchases 300
Net Cash Flow ? ? ? ? ? ?

Closing Balance ? ? ? ? ? ?

Particulars June July Aug Sept Aug Sept

Cash Inflow
Cash Sales 1000 800 1000 250 400 1500
Other income 300 100 300 50 200 500
Cash Outflow
Cash Purchases 2000 500 200 100 500 300
Salaries Paid 200 150 100 50 180 140
Selling Expenses 100 150 100 50 20 60
Opening Balance 8,000 ? ? ? ? ?
Net Cash Flow ? ? ? ? ? ?

Closing Balance ? ? ? ? ? ?

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 June July Aug Sept Aug Sep
Cash Sales 1000 2000 6000 e 6000 10,000
Cash Purchases 2000 a b 2000 1000 ?
Net cash flow
Opening Balance 4000 d s ? ? ?
Closing Balance c (3000) 9000 7000 ? 5000

Particulars April May June July Aug Sept

Opening Balance 200 ? 300 ? ? ?
Cash Inflow
Cash Sales 100 80 0 250 100 50
Rent Received 30 10 25 50 150 50
Interest Received 10 10 25 50 50 100
Cash Outflow
Cash Purchases 50 20 150 100 300 250
Other Expenses 5 0 150 50 20 50
Salaries Paid 5 10 10 20 80 40
Transportation expenses 10 15 20 10 110 60
Selling Expenses 10 15 70 20 90 100
Net Cash Flow ? ? ? ? ? ?

Closing Balance ? ? ? ? ? ?

Explain how better management of trade receivables and trade payables can improve cash flow.
Answers could include:
Trade receivables (debtors who have bought goods on credit) are shown on the statement of financial
position (balance sheet). They are one of the current assets.
Trade payables (accounts payable or creditors) are shown on the statement of financial position (balance
sheet). They are one of the current (short term) liabilities. Amounts owed to a supplier for goods or services
bought on account rather than for cash and who have not yet been paid.
Cash flow is the sum of cash payments to a business (inflows) less the sum of cash payments (outflows).
Explanation linked to improving cash flow
If credit control encourages trade receivables to pay for their goods and services more promptly this will
bring money into the business more quickly and so improve cash inflow, therefore improving overall cash
flow.
If a business can delay the payment of its trade payables this will keep money in the business for longer,
reducing cash outflow, therefore improving overall cash flow.
The more goods the house builder can buy on credit the more they can delay the payment of trade
payables until after payment of trade receivables. This will reduce cash outflows and improve the overall
cash flow.
Accept debt factoring as a management method.
Accept keeping of good records as better management.

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