Topic 3

Effective Financial Management

 Improving cash flow

Pages 66-69

To appreciate the purpose of consumer

protection laws & apply them to business
 Aims for today

To understand the main

aspects of financial
management as a means of
managing cash flow more
effectively.

To analyse ways of increasing

cash inflows and reducing
cash outflows
To appreciate the purpose of consumer
protection laws & apply them to business
 Cash and cash flow
Cash is vital to a businesss success and
includes notes, coins and money in the bank.

Cash flow is:

The flow of money coming into and
going out of a business
 Cash inflows
Cash Inflows: the cash coming into a business

Cash from the Loan from the Cash payments

individual bank from sales
 Cash outflows
Cash going out of a business

Equipment &
Wages & training Advertising
Stock
Telephone, gas, Interest Maintenance
electric & other bills on loans & repairs
 Net cash Flow
Net cash flow is the money left over when a
business takes its outflows from its inflows.

In other words, NET CASH FLOW IS:

the receipts of a business minus its payments

Example: If Nestle have 30,000 per month coming

in and pay out 10,000 in costs, their NET CASH
FLOW is 20,000.
 Task 1: Cash flow

Costa Coffee
In pairs, list the cash inflows and cash outflows
that Costa Coffee may have
 Costa Coffee: Some ideas
Cash inflows
Payments from customer
Interest on bank accounts,
savings & investments
Franchise fees, royalty
payments etc
Merchandise
Receipt of bank
loans/overdrafts
Cash outflows
Purchase of stock, raw
materials or tools.
Wages, rents and daily
operating expenses.
Purchase of fixed assets -
PCs, machinery, office
furniture, etc.
Loan repayments.
Dividend payments.
Income tax, corporation tax,
VAT and other taxes.
Reduced overdraft facilities.
 Financial Management

Deliberately changing monetary values

like cash flows to achieve financial
objectives
Increasing cash inflows

Increasing
sales
revenue

Long term
solutions Cash flow De-stocking
e.g. loans

Improving
C.F from
customers
 Increasing sales revenue
Sales revenue = Selling price x quantity sold

Main ways to boost sales revenue:

1. Improved marketing: Using alternative or
additional forms of advertising or product trials

2. Better products: Introducing new or

differentiated products to the marketplace
 De-stocking
Reducing stocks of finished products (possibly
having a sale to shift stock surpluses).
 Improving cash flow from customers
1. Reduce trade credit
2. Chase up late payments
3. Employ a factor
(A Factor is a financial company, often a bank that will
advance the money owed to a business by its customers)

What longer term solutions are there to

improving cash flow?

Solutions: Bank loan, issue shares (PLCs) or sale of

assets.
 Changing cash outflows
Reduce your
orders for
materials &
stock
Lease rather Delay paying
than buy invoices

Improve
& reduce
outflows
Business Mastermind
 A business takes out a loan from a bank
repayable over four years. This will lead to an
immediate large cash...

A inflow and smaller cash outflows over a period of time

B inflow and smaller cash inflows over a period of time
C outflow and smaller cash inflows over a period of time
D outflow and smaller cash outflows over a period of
time.

Answer A
 Gaweda manufacture DVD player parts. De-
stocking both raw materials and finished
products occurs in February. Between February
and April, this is most likely to lead to:
A improved cash flow because more raw materials will
be ordered
B improved cash flow because fewer raw materials
will be ordered
C improved cash flow because fewer finished products
will be sold
D a deterioration in cash flow because more finished
products will be sold.

Answer B
Which one of the following is most likely to
lead to improved cash inflows for a
business?
A Increasing the amount of materials bought from
suppliers
B Increasing the level of stocks of raw materials held
by the business
C Reducing the length of time customers are given to
pay their invoices
D Reducing the amount of time taken by the business
to pay its suppliers

Answer C
 Task 2:
Worksheet: Improving cash flow
 Homework: Revision Questions
1. What is meant by the term financial management?
2. What is the difference between a cash inflow and a cash outflow?
3. Give three examples of cash inflows to a business.
4. Explain the purpose of de-stocking.
5. Identify and explain one long term solution that might improve a
firms cash flow.
6. Outline three possible ways that cash flows out of a business.
7. What is meant by the term factor?
8. If a firm has a positive cash flow does this mean it is making a
profit?
9. How might changing the order levels of materials affect a business?
10. Delaying the payment of invoices is good for the cash outflow.
Explain what is meant by this and how it may affect a business.
 Homework: Revision Questions
1. What is meant by the term financial management?
2. What is the difference between a cash inflow and a cash outflow?
3. Give three examples of cash inflows to a business.
4. Explain the purpose of de-stocking.
5. Identify and explain one long term solution that might improve a
firms cash flow.
6. Outline three possible ways that cash flows out of a business.
7. What is meant by the term factor?
8. If a firm has a positive cash flow does this mean it is making a
profit?
9. How might changing the order levels of materials affect a business?
10. Delaying the payment of invoices is good for the cash outflow.
Explain what is meant by this and how it may affect a business.
 Revision Q: Answers
1. Financial management is the deliberate action of changing monetary variables to achieve
financial objectives, such as improved cash flows.
2. A cash inflow is cash coming into a business. A cash outflow is cash moving out of a
business.
3. Any three from the following (receiving): sales revenue; interest received from savings;
returns on other investments; sale of assets; money paid by debtors; rental of land or
buildings; any other relevant answer.
4. One way a business can increase its cash inflow is to make a conscious decision to reduce
its stocks of finished products by selling them off, known as de-stocking. Often it takes the
form of a sale where the finished goods are offered at reduced prices to customers for a
limited period. This usually results in customers buying more and an increase in revenue.
5. One of the following: bank loans taking out a loan from a bank o other similar institution
to inject capital into a business; issuing shares selling shares in the business to investors in
return for capital; selling assets selling machinery, buildings or land that is not needed; sale
and leaseback selling machinery, buildings or land then leasing them back to raise a lump
sum.
6. Any three from the following (paying for): raw materials; wages and salaries; rent; interest
on loans; electricity or gas; VAT; corporation tax; any other relevant answer.
 Revision Q: Answers
7. A factor is a financial company, such as a bank, that advances the money that a business is owed by
its customers immediately and charges a fee for its services. A firm can typically get up to 90% of the
value of invoices by using a factor.
8. Cash flow is not the same as profit. Cash flow is the amount of money flowing into and out of a
business over a given period of time whereas profit is the amount of money that is left over after the
total costs have been subtracted from total revenues over a given period of time (usually a year). It is
possible that businesses can have cash flow problems but still be a profitable venture. A positive cash
flow simply means more money has flowed into the business over a period of time than has flowed out.
It says nothing about overall costs and revenues, however.
9. The order levels that a business places add to the cash outflow. By changing the amounts that are
ordered the level of cash outflow can be directly affected. Reducing the levels ordered will clearly reduce
any cash outflow. Cutting order levels will, however, have an effect on the production quantities that a
firm enjoys. The fewer raw materials ordered will result in lower production quantities. Clearly this is a
strategy that can only be used if the sales levels are falling as well. There could be an argument that if a
firm is overproducing then this strategy could also be employed to bring production levels in line with
sales volumes, leading to efficient working practices such as Just-In-Time.
10. One way in which a business can improve its cash outflow is by delaying any payment on invoices
due. This is where a firm does not pay its invoices on time, for example after 30 days. The longer it can be
delayed the better the cash flow position as there will be less cash flowing out of the business.
It can, however, have a negative effect on the reputation of a firm as one that does not honour
agreements. This may result in offers of credit or discounts on orders from suppliers being withdrawn
which may have a significant effect on production and costs.