Download Simple-cash-flow

Cash flow
Cash inflow ££££
Business
£££ Cash Outflow
Lesson series on Cash flow
What is cash?
Cash flow shows the flow of money
into and out of a business over a
given time period
Why is cash flow important
• Without adequate cash even a company with high
sales might not survive
• If a business cannot pay its bills
– Suppliers would stop supplying it
– Workers would stop working and look for another job
• Particularly important for new businesses
– Most businesses that fail in their first year do so because of cash flow
problems
• Cash flow is not the same as profits. Profits are
revenues minus costs
Quiz
• Which of these are cash inflows or outflows?
Purchase of raw materials
Cash outflow when the bill is paid
Cash sales
Cash inflow
Wages
Cash outflow
Bank loan
Cash inflow
Rent
Cash outflow
Purchase of equipment
with credit card
Cash outflow when the bill is paid
Advertising
Cash outflow
Purchase of capital equipment
Cash outflow
Net Cash Flow and Bank Balance
Define Net Cash Flow
Cash inflow minus cash outflow
What is Opening Bank Balance
Bank balance at the beginning of the period
= balance at the end of the last period
What is Closing Bank Balance
Opening Bank Balance plus
Net Cash Flow
What’s the meaning of brackets
with numbers eg (500)
A minus number, so (500) is -500
Used in finance
Simple example
£
October
November
December
0
3,000
(1,000)
0
7,000
15,000
a
Opening balance
b
Finance raised
c
Cash from sales
d=b+c
Cash inflow
20,000
7,000
15,000
e
Cash outflow
17,000
11,000
12,000
f=d-c
Net cash flow
3,000
(4,000)
3,000
g=a+f
Closing balance
3,000
(1,000)
2,000
20,000
Simple example of a new business
£
October
November
December
0
3,000
(1,000)
0
7,000
15,000
a
Opening balance
b
Finance raised
c
Cash from sales
d=b+c
Cash inflow
20,000
7,000
15,000
e
Cash outflow
17,000
11,000
12,000
f=d-c
Net cash flow
3,000
(4,000)
3,000
g=a+f
Closing balance
3,000
(1,000)
2,000
•
•
•
•
•
•
•
•
20,000
Starting in October, the business has no money. This is shown in row a as an opening
balance of 0. This means the cash position at the beginning of the month
It raises £20,000 in the first month (row b)
Cash from sales is 0 this month because it is new (row c)
This means total cash inflow (row d) is £20,000 - finance plus cash from sales
Cash outflow is shown in row e at £17,000. It is large reflecting start-up costs
Net cash flow (row f) is cash inflow minus cash outflow
The closing balance (row g) tells us how much cash the business has at the end of the
month, which is the opening balance plus net cash flows in the month.
The opening balance for November is simply the closing balance for October
Mr. Brown’s Burger Bar
£
Opening balance
New capital
Cash from sales
Cash inflow
Cash outflow
Net cash flow
Closing bank balance
Jan
Feb
March
April
May
June
£
£
£
£
£
£
0
7,500
1,000
8,500
8,000
3,000
3,500
4,500
5,500
6,000
3,000
3,500
4,500
5,500
6,000
3,250
3,500
5,250
4,500
4,250
Mr Brown’s burger bar - the answers
£
Opening balance
Jan
Feb
March
April
May
June
£
£
£
£
£
£
0
500
250
250
(500)
500
New capital
7,500
Cash from sales
1,000
3,000
3,500
4,500
5,500
6,000
Cash inflow
8,500
3,000
3,500
4,500
5,500
6,000
Cash outflow
8,000
3,250
3,500
5,250
4,500
4,250
Net cash flow
500
(250)
0
(750)
1,000
1,750
Closing bank balance
500
250
250
(500)
500
2,250