CASH FLOW EXERCISE

Cash F!o& is im'ortant to he!' 're%ict cash nee%e% ( ho& m)ch money &i!! be nee%e% an% &hen it &i!! be nee%e% ( or to 're%ict cash s)r'!)s an% '!an in estments*

A: The story
In this exercise, participants simulate the cash operations of a business, recording all transactions and stating cash balance over some operational periods.

B: Basic information
Objecti es of !earnin" Basic objectives to be achieved by participants The participants appreciate the importance of cash flows in assessing the viability of their proposed enterprises; apply the easy steps in preparing cash flow projections; are stimulated to use the cash flow methodology in preparing their business plans. #ses Financial management, business plan preparation and development

C: $etho%
Cash f!o& metho%
ash in business can be compared to water that flows in a river. ash flows in from sales, loans, and e!uity. This puts the business highly dependent on its customers, financiers and sta"eholders. But in the process of producing goods and services, cash flows out to pay for materi# als, salaries $including the entrepreneur%s&, rent, electricity, water, interest, supply, transport, etc. If there is more water coming out than coming in to the river, then it will soon dry out. 'imilarly, businesses having more cash outflows than cash inflows will soon get into trouble. They will not be able to pay for their expenses as they fall due. ( difficult situation that every prospective entrepreneur should avoid. )ence, the importance of cash flow planning. But many entrepreneurs fail to realise this. They constantly run the ris" of being un # able to settle most of their bills. *oor cash planning practice is a major cause of

many small business failures. The cash planning process begins with figuring out how much cash is generated from sales receipts as well as other sources li"e loans, etc. for a certain time period. This figure represents cash inflows. +bviously, credit sales are excluded since they are not cash until they are fully paid for. Then, figure out how much cash is needed to settle all expenses for materials, rent, salaries, and others. This figure represents cash outflows. redit purchases are excluded since they are not cash transactions until they are fully paid for. The difference between cash inflows and cash outflows represents the ending cash balance. This cash balance within a period, say for a month, will automatically be# come the beginning balance for the next month. *reparing cash flow projection is easy and fun. It will consist of, cash inflows $or cash receipts& and cash outflows $or cash payments&. -i"ewise, it will have spaces for be# ginning and ending cash balance. The aim is to ensure that the available cash will be sufficient to meet the needs and obligations of the proposed business. If there are more cash outflows than inflows, then measure, such as selling more products, con# verting personal assets to cash, borrowing some money, etc., must be initiated. The format of a cash flow statement is shown on the next page. The profit figure generated by the *.- is not the cash in the business. In fact, some businesses can have very high profits but cash#less. /hy0 1ecall that profit consists of cash and non#cash items. ash, on the other hand, re # fers only to coins, ban" deposits, notes and che!ues. The non#cash items in profits consist of, credit sales, credit purchases, unpaid expenses, stoc"s, and depreciation. onsider a situation in which all sales are given on credit in a month. 2sing the for # mula, 'ales minus osts e!uals *rofit, and if the situation yields more sales than costs, then a profit figure will be registered. But since all sales are on credit $i.e., customers have not paid yet&, then there is profit but no cash.

Cash f!o& statement

4an B56I77I76 (') B(-(7 5 $(& (') 15 5I*T', 'ales 5!uity -oans ollection from redit 'ales T+T(- 15 5I*T' $B& (') (8(I-(B-5 F+1 2'5 $(9B& (') *(:357T', 3aterials /ages;'alaries 1ent 'tationery Transport +ther expenses T+T(- *(:357T' $ & Feb 3onths 3ar (pr 3ay

3I7I323 B(-(7 5 $<& T+T((') 755<5< $ 9<&

(') '21*-2';<5FI IT $(9B& = $ 9<& FI7(7 I76 $5& 57<I76 (') B(-(7 5 $(9B95# &

+)i%e!ines
The following !uestions may be helpful in planning each company>s cash position and strategies, a& (t the beginning of each period, what was the actual cash#on#hand for each com# pany0 b& (t the end of each period, what was the actual sales and cash#on#hand for each company0 c& /hat were the total payments made by each company0 d& )ow many do you plan to produce and sell for each period0 )ow much cash will this estimate re!uire0 e& /hat are the expenses for each round and when will each expense item fall due0 f& /ill your sales estimate sufficiently meet all the company>s expenses as they fall due0 g& )ow much will you need to borrow0 /hen will each borrowing occur0 h& )ow much cash will you have at the beginning and at the end of each period0

Cash f!o& e,ercise Case: -a.i Enter'rise an% Tra%in" /-ET0

(s of <ecember ?@st, A5T had cash amounting to B@CC plus some tools worth B@,CCC. )e decided to open a business to produce and sell various types of wooden chairs. )e vigorously maintained the practice of selling DCE on cash basis and the balance of FCE on credit to reliable customers. +n the average, he sells @CC pieces of chairs per month at BFC per unit. -i"ewise, he incurs the following costs per month, 1aw 3aterials -abour 1ent Transportation 'tationery BGCC B?CC BFCC B HC B FC

1ent is paid three months in advance starting from 4anuary. -abour of current month is paid for on the first day of next month. (ll other costs are paid for immediately when they are incurred. Aa"i does not intend to withdraw any money up to February. From then onwards, he plans to withdraw BGCC per month. (lso Aa"i feels that he should have in his cash box a minimum of BFCC per month to handle any emergency. *repare a cash flow for Aa"i 5nterprise and Trading from first 4anuary to ?@st 3arch of the year.

CASH FLOW EXERCISE So!)tion to the case

3+7T)' 4anuary B56I77I76 (') B(-(7 5, $(& February 3arch

(') 15 5I*T', 'ales +ther T+T(- 15 5I*T' $B& (') (8(I-(B-5 F+1 2'5 $(9B& (') *(:357T', 3aterials /ages;'alaries 1ent 'tationery Transport +ther 5xpenses T+T(- *(:357T' $ & 3I7I323 B(-(7 5 $<& T+T((') 755<5< $ 9 <&

(') '21*-2';$<5FI IT& $( 9 B& # $ 9 <& FI7(7 I76 $5& 57<I76 (') B(-(7 5 $F& $F I ( 9 B 9 5 # &

Note: Cash Flow of Ongoing Business.