Unit 1: Cash Flow Essentials
cash flow, finance, financial management ]
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Cash flow management
- is a process that involves collecting payments, controlling disbursements, covering shortfalls, forecasting cash needs, investing idle funds, and compensating the banks that support these actions.
- cash flow management requires coordination between treasury and operations.
- Technology and electronic systems for gathering diverse financial information and formatting it into useful reports for decision making.
Cash for agri-business
•Cash flow management can be practiced to a point where every available euro is at work either covering payment of cheques or producing income.
•cash flow management continues to be a complex process -- and increasingly so on the agribusiness
Sources and applications of cash
•the issue of what was done with business income.
•used to purchase additional machinery and equipment
•used to expand the business and/or buy additional land
•used for higher family living expenditures.
•diversified investments away from the farm
•How much should go to increase the farm cash reserves?
An exercise From Manchester Science Enterprise Centre
•Raw materials and equipment
•Utility bills – gas, electric, telephone, postage etc
•Premises (Rental or Mortgage)
Marketing and advertising costs
(Manchester Science Enterprise Centre)
Your Cash Inflows
•Sales of goods
•Subscriptions to services
•Sale of Intellectual Property rights
•Money from royalties
•Sale of assets
Break even analysis
•Need to sell enough product to cover costs = Break even point
•Variable costs: varies in proportion to production e.g. raw materials
•Fixed costs: does not change e.g. Rent, wages
•Fixed costs contribution per unit decreases when you make more products !
Working Capital Cycle
Three main statements
•Balance Sheet – A ‘snap shot’ of the company’s financial situation at a point in time (e.g. end of year)
–Assets, Liabilities, Owner’s Equity
•Profit and Loss Statement – From…..to…. (Usually 12 month period)
–Income (Revenue) and Expenses
•Cash flow Statement – From ….to….
–Sources of Cash in and Cash out
Flow of Cash Through a Business
Cash Flow (1/2)
•The flow of cash into and out of a business
•Can be net positive or negative
•Continuously moving picture
•Especially important for a new start-up company- may update daily!
•NOT simply sales minus expenditure
Cash Flow (2/2)
Analysing Cash Flow
1.Net Cash Flow +ve or –ve? What are the problems?
2.Determine main causes of problem – costs or income?
3.Profitable companies with full order books can still fail !
Use the Pareto (80:20) Rule
Profit and Loss Statement
•A report on expenses and income over a period of time.
•How does that relate to cash?
–Cost of Goods sold
Profit and Loss Details
Less: Cost of Goods sold
= Gross Profit
Less: Operating Expenses
= Operating Profit or Earning before interest and Tax (EBIT)
=Earnings before Tax (EBT)
= Net Profit
Why do this ?
•To show investors you are profitable (or to forecast profitability)
•To identify areas where the company could improve and identify potential problems
•To show investors you are efficient
•To show customers and suppliers you will still be around next year !
•It may be required by law !