(i) Cash flow forecast for NPF June 2010 – November 2010

Item June July August September October November

Donations received 40 30 30 20 20 10
Opening cash balance 1 –8.25 –17 –16.25 –26.5 –26.25
Total cash available – 41 21.75 13 3.75 –6.5 –16.25
inflow
Outflows: 47.5 38 28.5 28.5 19 19
payments (donation
transfers)
Internet usage fee 1 1
Maintenance fee for 0.25 0.25 0.25 0.25 0.25 0.25
servers and computers
Web designer’s fee 0.5 0.5 0.5 0.5 0.5 0.5
Concert sponsoring fee 5
Total cash available – 49.25 38.75 29.25 30.25 19.75 24.75
outflows
Closing cash balance –8.25 –17 –16.25 –26.5 –26.25 –41

[1 mark]
The candidate conveys some understanding of what a cash-flow forecast is, but
otherwise the forecast is largely inaccurate, incomplete, or illegible.
[2 to 3 marks]
A cash-flow forecast is drawn, but either it is not in a generally accepted format
or it is untidy, and the forecast contains two or more errors.
[4 to 5 marks]
The cash-flow forecast is drawn essentially correctly and neatly in a generally
accepted format. Award [5 marks] if there is one error, [4 marks] if there are
two errors. If the candidate produces an accurate cash-flow forecast (that is, the
final closing cash balance is correct and the means by which the candidate
arrived at that figure is clear and logical) but does not use a generally accepted
format, award [5 marks].
[6 marks]
The cash-flow forecast is drawn accurately and neatly in a generally accepted
format, and is error free.
Do not penalize a response more than once for errors that are carried forward.
[6]
(ii) (1) The cash-flow forecast reveals a worrying deterioration in the cash-flow
position of NPF. Although the organization was set up with a generous
contribution we must assume that cash reserves must be running low.
(2) There are forecast to be very marginal improvements in August and
October (the negatives are slightly smaller than the previous month) but
 the sponsorship of the concert in November will impose a significant
drain on cash resourcing at a time of dwindling donations.
Allow discretion when Own Figure Rule (OFR) applies to the comments.
Award [1 mark] for overall deterioration: [1 mark] for marginal improvements
in August and October. [1 mark] for November outflow.
Award [1 mark] for each correct and appropriate comment based on the
forecast, such as the breakdown above, up to a maximum of [3 marks].
[3]
(iii) They can either reduce the outflow or increase the inflow, or elements of both.
NPF could:
• Try to secure a bank overdraft to increase cash inflow. It may be difficult
to obtain this with no assets to be used as collateral but NPF has no debt
in 2010.
• Seek a fresh injection of capital from the retired businessman or find
another investor which holds a similar view and vision about educational
opportunities for children in developing countries. The fresh injection will
clearly increase cash inflow.
• Try to co-sponsor the concert with another charity through a joint venture
or strategic alliance in order to reduce the cash outflow.
• Fundraise through e-commerce or other merchandising opportunities to
increase the cash inflow.
• Negotiate lower fees for web design and maintenance or find more
socially responsible providers – in order to reduce outflow.
• Any other relevant solution.
Mark as 3+3.
Award [1 mark] for a brief and general answer (possibly just a list) with no
development/explanation.
Award [2 marks] for an adequate explanation of the possible solution to the
liquidity problems highlighted in parts (i) and (ii), though the response may be
lacking in clarity or detail.
Award [3 marks] for a clear and detailed explanation of the possible solution to
the liquidity problems highlighted in parts (i) and (ii). Reference is made to the
stimulus material.
[6]
 Cash inflows January February March April May June
Cash from savings 25 000
Cash from bank loan 50 000
Sales 2000 2400 2880 3456 4147 4976
Total inflow 77 000 2400 2880 3456 4147 4976

Outflows
Start-up expenses 15 000
Rent 2000 2000 2000 2000 2000 2000
Manager’s salary 2000 2000 2120 2120 2120 2120
Loan payment 1000 1000 1000 1000 1000 1000
Labour 1000 1200 1440 1728 2074 2489
Total outflow 21 000 6200 6560 6848 7194 7609
Net cashflow 56 000 –3800 –3680 –3392 –3047 –2633

Opening balance 0 56 000 52 200 48 520 45 128 42 081

Closing balance 56 000 52 200 48 520 45 128 42 081 39 448

[1 mark]
The student conveys some understanding of what a cash flow forecast is, but otherwise
the forecast is largely inaccurate, incomplete, or illegible.
[2 to 3 marks]
A cash flow forecast is drawn, but either it is not in a generally accepted format or it is
untidy, and the forecast contains two or more errors.
[4 to 5 marks]
The cash flow forecast is drawn essentially correctly and neatly in a generally accepted
format. Award [5 marks] if there is one error, [4 marks] if there are two errors. Bear
in mind the Own Figure Rule (OFR): if a candidate makes an error in one row and
carries it through the remainder of the forecast, that is only one error. If the candidate
produces an accurate cash flow forecast (that is, the final closing balance is correct and
the means by which the student arrived at that figure is clear and logical) but does not
use a generally accepted format, award [5 marks].
[6 marks]
The cash flow forecast is drawn accurately and neatly in a generally accepted format,
and is error free. Candidates may round figures, as is done here, but are not required to.
[6]
Based upon the projected cash flow, Nails by Joomin should not have difficulty in meeting its
cash requirements. Because of both the bank loan and the injection of Joomin’s
personal savings, she will open the store with sufficient cash reserves until it has
developed a customer base adequate to be cash flow positive on a monthly basis. If the
projections prove accurate and trends continue, the new shop should be cash flow
positive on a monthly basis beginning in the tenth month. If trends continue and there
are no unexpected expenses, the firm’s cash reserves should never dip below $35 000.
Cash flow projections, however, often do not materialize, and it is difficult to
anticipate all expenses. As demand for the store’s services grows, Joomin may not be
able to find sufficient labour to meet customers’ needs. If these unexpected
circumstances occur, it will prove that it was beneficial to have opened the store with
such a large cash reserve.
[1 to 2 marks]
The answer is basic and does not question the accuracy or reliability of cash flow
projections or if the candidate fails to recognize that the trend of the cash flow forecast
is positive.
[3 to 4 marks]
The candidate recognizes that the cash flow projections, and extrapolations there from
for the months following, suggest that the firm will have more than enough cash to
meet its requirements until the new store is cash flow positive on a month-to-month
basis.
[4]

Cochabamba Academy

Silvia and Daniel are planning to open a school in Bolivia called the Cochabamba
Academy. They are currently analysing the figures to consider whether, with their
initial capital investment of $63 000, the Academy will be profitable. They are worried
about potential cash flow problems that the school might face and have collected the
following financial information:

Planned Inflows
• a monthly school fee paid from February until November of $200 per student
• an annual registration fee of $300 in October

Planned Outflows
• a total of 11 teachers will be employed at $500 per month, per teacher
• Silvia and Daniel will manage the school and pay themselves salaries of $2000 each
per month
• the average monthly expenses are $20 000

They plan to open 8 classes. Each class will have an average of 20 children. Below is
an excerpt from a cash flow forecast that they have prepared:

September October November December

Inflows 0
Fees 32 000 32 000 32 000
Registration fee 48 000
 Total Inflows 32 000 80 000 32 000 0
Outflows
Salaries 9500 9500 9500 9500
Expenses 20 000 20 000 20 000 20 000
Total Outflows 29 500 29 500 29 500 29 500
Net cash flow 2500
Opening balance 15 000
Closing balance 17 500

September October November December

Inflows
Fees 32 000 32 000 32 000 0
Registration 48 000
Total A 32 000 80 000 32 000 0
Outflows
Salaries 9500 9500 9500 9500
Expenses 20 000 20 000 20 000 20 000
Total B 29 500 29 500 29 500 29 500
A-B 2500 50 500 2500 (29 500)
Opening bank 15 000 17 500 68 000 70 500
balance
Closing bank 17 500 68 000 70 500 41 000
balance

[4 marks]
The answers are completely accurately. No mistakes are made.
[2 to 3 marks]
The answers are essentially accurate but one mistake is made for [3 marks].
[1 mark]
The answers are inaccurate, showing only a basic knowledge of cash flow. There are
two or more mistakes.
[4]

Essentially the cash flow situation is positive, since there are no months in which the school
has to use the overdraft facility of the bank. It does not need to borrow. It seems that
expenses are rather high for the two months when there are no students. If they could
keep expenses down during those months, cash flow could improve. The registration
 fees are necessary to provide the buffer to face the difficulty of the months with no
inflows.
[3 to 4 marks]
The cash flow situation is clearly commented on. Attention is paid to the months
without inflow, and to the buffer effect of registration fees.
[1 to 2 marks]
The cash flow situation is described as positive with little or no detail given.
N.B. Please note own figure rule applies if candidate’s answer in the previous question
is different to those in the table.
[4]

January February March April

Sales – cash 3 000 000 3 200 000 3 450 000 3 550 000
Total inflow 3 000 000 3 200 000 3 450 000 3 550 000
Stock 4 000 000 1 000 000 1 000 000 1 000 000
Wages 1 000 000 1 000 000 1 000 000 1 000 000
Electricity 200 000 200 000 200 000 200 000
Rent 100 000 100 000 100 000 100 000
Other 150 000 150 000 150 000 150 000
Purchase of capital
equipment 4 000 000
Total outflow 5 450 000 2 450 000 6 450 000 2 450 000
Net cash flow –2 450 000 750 000 –3 000 000 1 100 000
Opening balance 3 500 000 1 050 000 1 800 000 –1 200 000
Closing balance 1 050 000 1 800 000 –1 200 000 –100 000
[4 to 6 marks]
For a detailed and accurate cash flow, which has an appropriate layout.
[1 to 3 marks]
For a cash flow which has an appropriate layout, but has several errors and/or may lack
detail.
Do not penalize a response more than once for errors that carry forward.
[6]

A company will be profitable if the revenue is greater than the costs over a period of time e.g.
one year. Cash flow difficulties arise if the outgoings are greater than the inflows and
there is a shortage of cash. A cash flow problem arises in March and April, yet this
project is very profitable over the five-year period. The problem arises because the
firm has a short-term liquidity problem associated with the high cost of the capital
expenditure, yet in the long-term seems very profitable.
[3 to 4 marks]
Clear understanding of the difference between cash flow and profit. Clear explanation
linked to the case study.
[1 to 2 marks]
Some understanding of the difference between cash flow and profit. Limited or no
reference is made to the case study.
[4]