<5.2 CASH-FLOW & WORKING CAPITAL>

--5.2.1 IMPORTANCE--

"82% of businesses experience or fail because of cash flow problems" (Business insider)

--IMPORTANCE OF 'CASH'--

--AS A LIQUID ASSET--

CASH is a LIQUID ASSET, meaning that it can IMMEDIATELY BE USED TO SPEND, unlike ASSETS such as REAL-ESTATE (E.g Buildings, vehicles etc.). Do you think you can easily pay your tax or salaries by selling a car or building?
As such when paying your electricity bills, taxes or salaries If you don't have enough cash available (No READY-CASH), then the firm will FACE MAJOR PROBLEMS:-
- - - - UNABLE TO PAY WORKERS, SUPPLIERS, RENT...
        WORK AND PRODUCTION WILL CEASE.
        REVENUE WILL NOT BE GENERATED
        BUSINESS IS UNABLE TO PAY THEIR DEBTS
        FORCED INTO 'LIQUIDATION'

--TASK--

Apply the 5 major cash problems mentioned above to TES:

"If TES suffered a cash flow crisis and had no liquid assets it would mean..."

--SOURCES OF CASH FLOW--

--DEFINITION--

CASH FLOW as the name suggest refers to the 'FLOW' of CASH ACTUALLY COMING INTO OR LEAVING THE BUSINESS, like the money you receive from customers (inflow) or the money you spend (outflow) on buying raw materials over a period of time.
NOTE: It is a 'flow', so cash that you hold in the bank etc... is NOT INCLUDED as it isn't 'FLOWING' in or out.

--TASK--

Explain how it is possible to have millions in the banks but still have a negative cash-flow.

--CASH INFLOWS--

REVENUE from SALES: This is an inflow because when you sell something, the customer gives you money.
DEBTOR REPAYMENTS: This is an inflow because 'debtors' are people that you have LOANED money to in the past who are now PAYING you back.
LOANS: This is an inflow as you receive cash when YOU BORROW money say from a bank.
SALE of ASSETS: This is an inflow as when you sell something you ALREADY OWN, you receive money
SALE of SHARES: This is an inflow as when you sell shares, investors will give you money in return for a % of ownership.

--CASH OUTFLOWS--

PURCHASE of MATERIALS: This is an outflow because when you buy something, you give the seller money.
CREDITOR PAYMENTS: This is an outflow because 'creditors' are people that you have BORROWED money from in the past who you are now PAYING back.
LOAN REPAYMENTS: This is an outflow as you spend cash when YOU REPAY loans from a bank.
PURCHASE of ASSETS: This is an out flow as when you buy something you DON'T ALREADY OWN, you spend money.
EXPENSES: This is an outflow as when you pay your staff, rent, electricity bill etc... you spend money.

--TASK--

Use the main 5 cash inflows and 5 cash outflows listed above and create a two-column table like the one below and apply it either TES or a company of your choice IN CONTEXT1!!!!!!! (I have done one for LFC as a guide)

"@TES cash inflows include the money they receive from..."

--PROFITABLE FIRMS CAN SUFFER--

--PROFITS ≠ CASHFLOW--

PROFITS occur when the REVENUE is greater than the COSTS right? but did you know REVENUE includes MONEY THAT IS STILL OWED, this is called ACCOUNTS RECEIVABLE and it is very common for a firm to allow customers to 'BUY NOW, PAY LATER'.
In addition, firms INITIALLY SPEND CASH to PURCHASE RAW MATERIALS, to PRODUCE THEIR GOODS, before then SELLING THEM and RECEIVING A CASH INFLOW.
This 'CASH CYCLE' implies that there is a TIME INTERVAL between CASH OUTFLOW and CASH INFLOW, as such EVEN A PROFITABLE BUSINESS CAN FIND ITSELF VULNERABLE to CASH SHORTAGES, and UNABLE TO PAY FOR ITS DAY-TO DAY EXPENSES, leading to 'INSOLVENCY'.
Hence the IMPORTANCE of a CASH FLOW FORECAST.

--TASK--

Apply the text above to TES:

"Despite TES regularly recording a profit it could become vulnerable to a cashflow problem because..."

--'CASH FLOW FORECAST'--

-DEFINITION--

A CASH FLOW FORECAST refers to the ESTIMATE of the MONTHLY CASH FLOW PREDICTIONS of a firm into the near future. It is used to inform managers about the following:
- - - How much cash is available to PAY EXPENSES etc...
    - How much cash a firm may NEED TO BORROW.
    - How much SPARE CASH is LYING IDLE.

-WHY ARE CASH FLOW FORECASTS USED?--

STARTING A BUSINESS: When STARTING A BUSINESS, there are HUGE SET-UP COSTS, including MARKETING and PROMOTION to create awareness, and in most cases, there are ZERO SALES, hence managing the CASHFLOW is extremely important.
TO INFORM CREDITORS: If a firm wishes to BORROW FUNDS, then the LENDERS will INSIST on SEEING THE FIRM'S CASH FLOW FORECAST, so they can FORESEE and BETTER EVALUATE THE RISK OF THE LOAN.
PLANNING PURPOSES: THE FORCAST GIVES FIRMS A WAY OF PLANNING AHEAD, FOR EXAMPLE, IF A NEGATIVE IS FORECAST, THEN THE FIRM CAN START PREPARING FOR AN OVERDRAFT, AND IF A POSITIVE IS FORECAST, THEN THAY MAY WELL START ORDERING INVENTORY

--EXAMPLE--

NET CASH FLOW = CASH INFLOW - CASH OUTFLOW.
THIS MONTH'S OPENING BALANCE = LAST MONTHS CLOSING BALANCE
THIS MONTH'S CLOSING BALANCE = OPENING BALANCE + NET CASH FLOW
SO WHAT ARE X & Y?

--SR CASH FLOW vs LR CASH FLOW--

-SHORT-RUN--

SHORT-RUN CASH FLOW PROBLEMS refer to those occasions when a business doesn’t have enough money for a SHORT TIME, like when they NEED TO PAY BILLS TODAY but their CUSTOMERS WON'T PAY them UNTIL NEXT WEEK. This is a SHORT-TERM PROBLEM as IT WILL BE SOLVED SOON.

-LONG-RUN--

LONG-RUN CASH FLOW PROBLEMS on the other hand, refers to LONG-LASTING ISSUES that happen when a business ISN'T MAKING ENOUGH MONEY TO COVER ITS COSTS FOR WEEKS OR MONTHS or EVEN YEARS. This can be a result of POOR SALES, HIGH COSTS, INABILITY TO SELL SHARES etc...
This is a LONG-TERM PROBLEM as IT WILL TAKE BIG CHANGES FOR IT TO BE SOLVED.

--SOLVING SR CASH FLOW PROBLEMS--

--INFLOWS⬆️--

--OUTFLOWS⬇️--

--BORROWING--

(-) BORROWING MORE MONEY inevitably means HIGHER INTEREST PAYMENTS in the future.

--DELAY SUPPLIER PAYMENTS--

(-) SUPPLIERS may REFUSE TO DO BUSINESS WITH YOU IN THE FUTURE or OFFER DISCOUNTS.
(-) If SUPPLIERS of a CRUCIAL RAW MATERIAL REFUSE TO DO FUTURE BUSINESS, then the firm will not be able to go on producing.

--CUSTOMERS PAY QUICKER--

(-) CUSTOMERS may NOT BUY YOUR PRODUCT ANYMORE, and will instead BUY FROM A COMPETITOR who offers them a longer time to pay (line of credit).

--CANCEL PURCHASES--

(-) CANCELING PURCHASES of MUCH-NEEDED, or ESSENTIAL MACHINERY or EQUIPMENT may HARM the performance of the firm in the LONG-RUN.

--TASK--

Using the information above discuss how TES could overcome short run cash flow problems by increasing its inflows and decreasing it outflows.
"In order to address the problem of being short of cash for this month's electricity bill due to the fact that tuition fees are only received in two months time, I suggest we need to consider the following, firstly to increase inflows we could simply borrow more, though this would mean.... or we could....though, alternatively we could seek to decrease outflows by,....however..."

--OVERCOMING LR CASH FLOW PROBLEMS--

--INFLOWS⬆️--

--OUTFLOWS⬇️--

--ATTRACT NEW INVESTORS--

The firm can ISSUE MORE SHARES and INCREASE THE CASH INFLOW.

--INCREASE EFFICIENCY--

INCREASING EFFICIENCY, should LOWER AVERAGE COSTS and hence REDUCE CASH OUTFLOWS.

--DEVELOP NEW PRODUCTS--

NEW PRODUCTS will ATTRACT MORE CUSTOMERS, so they will MAKE MORE REVENUE and hence CASH INFLOWS will INCREASE.

--CUTTING COSTS--

By SOURCING CHEAPER SOURCES of RAW MATERIALS, making STAFF REDUNDANT etc, CAN CUT COSTS.

--TASK--

Using the information above discuss how TES could overcome long run cash flow problems by increasing its inflows and decreasing it outflows.
"In order to address the problem of constantly being short of cash, I suggest we need to consider the following, firstly to increase inflows we could try to attract new investors, and sell more shares, this way,... alternatively we could seek to decrease outflows by,....however..."

--5.2.2 WORKING CAPITAL--

--DEFINITION--

'WORKING CAPITAL' is the term given to the $-value of all LIQUID ASSETS; that can be USED TODAY to keep things running. These include CASH ITSELF, ACCOUNTS RECEIVABLE (Which is CASH that is soon OWED TO YOU) and INVENTORIES (Which refers to your stocks that you can (Hopefully!) sell for CASH)...

...LESS the $-value of all MONEY IT OWES

In other words its what WHAT YOU OWN - WHAT YOU OWE

NOTE that I said 'owed', as well which implies that a firm can have a cashflow shortage now but have enough liquid assets in the form of money owed and the ability to sell of stock to manage the shortage. For example APPLE spends $10k on a new printer, but only receives 4k from sales, hence it has a cashflow shortage, however they have stock worth 200k and will get paid 100k by other customers at the end of the month.

--CAN BE TURNED INTO CASH--

CASH ITSELF: In the safe.
DEBTORS: Customers that OWE you CASH.
INVENTORIES: =Stock that can be SOLD FOR CASH.

--MUST BE PAID IN CASH--

CREDITORS: Suppliers that you OWE CASH to.
LOANS: Borrowed funds that must be repaid SOON in CASH.

--TASK--

Explain how a company can have very little cash, but still have a large amount of working capital.

--IMPORTANCE--

If a firm is UNABLE TO MEET ITS DAY-TO-DAY EXPENDITURES (Called 'REVENUE EXPENDITURE'), then its OPERATIONS MAY SIMPLY CEASE, REGARDLESS OF WHETHER THE FIRM IS PROFITABLE.
For example, many firms offer 'BUY NOW, PAY LATER' payment plans, which means the firm receives its revenue in increments, which when totaled will show a healthy profit, however, if an emergency need for ready cash were to occur early on then they may be in trouble.
Can you imagine what would happen if TES had no electricity for a month? Despite having large working capital as they receive a large amount of tuition fees at the end of the month, they will have no cash to pay today.

--TASK--

--PAST PAPERS--

--2-MARKERS--

--4-MARKERS--

(DDC) Calculate values for W, X, Y & Z.

--8-MARKERS--

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