CIMA CASE STUDY
10th February, 2012
1.. describe what is meant by ‘cash flow’
Basically, cash flow is the movement of cash into and out of a certain business during a period of time. It is vital to keep in mind that cash flow does not affect the business’s revenue, and thus profit as well. Cash flow, as I have mentioned, is a ‘movement’ meaning that it can be both positive and negative. If the cash ‘inflow’ is higher than the cash ‘outflow’, it gives a positive net cash flow, which means that business will receive more money than it has spent. However, with more outflow than inflow, it will result in a negative net cash flow, which will lead to problems such as not being able to pay bills on time, etc. 2/2
2.. explain how a cash flow forecast can help a business now and in the future As the case study has mentioned, every organizations and businesses have to manage and monitor their cash flows with great care. A basic cash flow forecast is based on three key concepts: cash inflow, cash outflow, and net cash flow. – predictions into the future In the case study, there is a cash flow forecast for a company called Tesco. It shows the concepts mentioned just now for four consecutive months. Making these cash flow forecasts can help a business in many ways. There are situations when a business needs external finance in order to keep the company running. Most of the time, banks and other lenders require the business to make a cash flow forecast to help themselves better assess the financial health of the business and decide whether or not the business will be able to pay the money that they are going to lend. Considering the cash flow forecast of Tesco (it is shown on the case study as an example), the first two negative cash flows will make the bank and lenders to think that Tesco might not be capable of returning the money at all. However, as the net cash flow turns positive, starting from March, it suggests that after a period of time, Tesco will eventually be able to pay the money back. Like this, cash flow forecasts can be used to convince banks and lenders to provide financial back up to the company. Cash flow forecast can help managers of businesses to anticipate the possible cash deficiency periods. This can help businesses to deal with liquidity problems (liquidity is the ability of a company to turn its assets into cash in short period of time without losing the initial value of the product). With the aid of cash flow forecast, company will be able to adjust the timings to its cash inflows/outflows so that it will have the necessary amount of money to pay its suppliers back when it is necessary. Sometimes, businesses make mistake by giving their customers (debtors) longer credit term than their suppliers (creditors) gave to the companies. This leads to a huge problem by not having enough working capital to pay the suppliers back in time. Obviously suppliers will not be happy about this and might decide to end their business with the companies. Members of CIMA, however, will carry out the cash flow forecast beforehand and prepare the company they work for against the potential problems. Lastly, cash flow forecasting definitely aids the planning process of a business. Having solid financial control can help a business to better achieve its aims and objectives. After the accountants finish making the cash flow forecast for Tesco, as shown in the case study, these forecasts can be compared with the real-life figures and improve future planning and predictions. This can prevent businesses from causing problems like overtrading. Because the company now knows the numbers for the cash flow, they will be aware that they will not have enough capital to expand next month (for example). Thus, cash flow forecasts can help the company in many ways, including now, and in the future, as well. 6/6
3.. analyze why cash is considered to be more important to a business than revenue or...