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Cash Flow Lesson 1

1. Cash is the actual money a business has available, while profit is the amount of money made after expenses have been deducted from revenue. 2. Two reasons why cash is important for a business are: - It allows a business to pay its bills and suppliers so it can continue operating. - It enables a business to pay wages so it can retain employees.

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16 views

Cash Flow Lesson 1

1. Cash is the actual money a business has available, while profit is the amount of money made after expenses have been deducted from revenue. 2. Two reasons why cash is important for a business are: - It allows a business to pay its bills and suppliers so it can continue operating. - It enables a business to pay wages so it can retain employees.

Uploaded by

jamesmannix
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Cash Flow

Monday 29th January


Do Now
• A business has struggled to pay its staff's wages on time for the last
three months.

• Explain one source of finance that may help them overcome this
issue.
2 marks
Challenge
Remember... Explain what a potential
1 mark for point issue may be with this
1 mark for development source of finance being
used.
Do Now
• A business has struggled to pay its staff's wages on time for the last two months.

• Explain one source of finance that may help them overcome this issue.
Point Development 2 marks
Overdraft Would enable the business to spend more than
they have available in their bank account,
allowing them to pay workers on time. Peer assess!
Sell assets This may free up cash to pay workers if they
have assets such as machinery that are no
longer used.
Trade credit By paying for stock over a longer period of
time, this could free up cash to pay workers
on time.

Which sources of finance would not be suitable for this scenario? Why?
Challenge Question
• What is the likely cause of a business
being unable to pay wages (or other
bills) on time?

1 minute to discuss with your partner.

A lack of cash available!


Cash Flow

• By the end of this topic, you should be able to: New Key Terms:
o Explain the difference between cash and profit Cash
o Explain the importance of cash to businesses Cash flow
o Analyse how and why cash flow forecasts are Inflows
constructed. Outflows
o Calculate, identify and interpret sections of a cash Net cash flow
flow forecast. Opening balance
o Identify and analyse the consequences of cash flow Closing balance
problems and the effect of positive cash flow. Liquidity
o Evaluate possible solutions to cash flow problems. Cash flow solutions
What is cash?
• Cash is the tangible money a business has, that it can use. It can be
coins, notes or money in the bank.

What doesn’t count as cash?


• Trade credit
• Overdue bills Explain why each of these
not be classed as cash.
• Debtors
Cash v Profit
What time of year are Oldham Athletic
likely to have the most money coming into
the business?

Summer months:
• Season tickets sales
• New shirts and merchandise sales
• New sponsorship deals
Cash v Profit
• Cash is the money a business has available at a given
time.
• Profit is the amount a business has made at the end of the
year, once all costs are accounted for. This money can be
kept or given to shareholders.

• Just because a business is profitable over the course of a


year, doesn't mean it has cash available at all times. The
reverse is also true!
Why is cash important to a business?
2 minutes to identify at least three reasons why cash is important to a business
– write these down on your whiteboards.
Challenge: Justify your most important reason.

• Helps pay for raw materials


• Enables the business to pay staff's wages
• Enables the business to pay its bills
• Can be used to fund some expansion
• Can attract investment
• Survival of the business
Why is cash important to a business?
Task 1: Explain each of the reasons that cash is important to a business.
MODEL ANSWER:
Point: Helps pay for raw materials.
Explanation: This means that the business can continue to manufacture
their products in time, which will mean that customer satisfaction will
remain high and the business can build its customer base on this good
reputation.

12 minutes to complete grid.


Why is cash important to a business?
Knowledge Check
• Explain the difference between cash and profit
• Explain the importance of cash to businesses
Knowledge Check

1. Which of these is not a potential example of cash?


A. Revenue generated from sales
B. Trade credit
C. A bank loan deposited in a business' account
D. Funds from selling shares
Knowledge Check

2. How is cash different from profit?


A. Profit represents the actual money that a firm has on hand, while cash
represents the amount of money left over after all expenses have been
paid
B. Cash represents the actual money that a firm has on hand, while profit
represents the amount of money left over after all expenses have been
paid
C. Cash is a long-term financial measure, profit is a short-term financial
measure
D. Cash takes into account money that is owed to the business, whilst
profit doesn't take this into account.
Knowledge Check

3. What is the main measure of a company's financial performance over


a period of time?
A. Stock
B. Cash
C. Staff motivation
D. Profit
Knowledge Check

4. Which of these is not a reason for cash being important for a


business?
A. It helps survival
B. Can attract investment
C. It ensures the business is profitable
D. Can help expansion
Knowledge Check

5. Which of these is not a likely outcome of not having enough cash to


pay staff on time.
A. Staff motivation will increase
B. Workers will consider looking for new jobs
C. Quality of products will decrease
D. Higher staff absence
Cash Flow

• By the end of this topic, you should be able to: New Key Terms:
o Explain the difference between cash and profit Cash
o Explain the importance of cash to businesses Cash flow
o Analyse how and why cash flow forecasts are Inflows
constructed. Outflows
o Calculate, identify and interpret sections of a cash Net cash flow
flow forecast. Opening balance
o Identify and analyse the consequences of cash flow Closing balance
problems and the effect of positive cash flow. Liquidity
o Evaluate possible solutions to cash flow problems. Cash flow solutions
Practice Question
Kerry is an artist who, alongside her part-time job at an art gallery, is a
producer of personalised Easter, Halloween and Christmas decorations.
The majority of her sales take place between March and April, and
October and December each year. Kerry uses a job production to make
her decorations and has to pay her suppliers up-front for her materials.
Customers typically pay Kerry upon receipt of the decoration.

Analyse why cash is important to Kerry’s Christmas decorations business.


[6 marks]
How do we answer a 6 mark question?
6 mark questions
• Analyse question.
• Only one point required - take this from the case study!
• No definition – start with point.
• There should be at least 3-4 chains of argument (BLT++) in the
response.
• The chains of argument should refer to the context throughout.
Practice Question
Kerry is an artist who, alongside her part-time job at an art gallery, is a
producer of personalised Easter, Halloween and Christmas decorations.
The majority of her sales take place between March and April, and
October and December each year. Kerry uses a job production to make
her decorations and has to pay her suppliers up-front for her materials.
Customers typically pay Kerry upon receipt of the decoration.

Analyse why cash is important to Kerry’s Christmas decorations business.


[6 marks]
8 minutes to complete
Plenary
1. Name one difference between cash and profit.
2. Give two reasons why cash is important.

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