Unit 3.7 Business Management

Unit 3.7 Cash flow

CASH FLOW #1

Not all artists have their head in the clouds! A talented young digital artist called Richard hoped to open a small shop to sell their digital art, comics and cartoons. Before starting, Richard (who knew a little about business) decided to create a cash flow forecast to see if the project was viable. 

Richard’s main targeted clients would be people passing by the shop, but also by selling online too! Richard plans to start trading on August 1st and has initial capital to start the shop of $10,000

  1. Sales for the first four months are forecast as $2000 (Aug), $3000 (Sept), $4000 (Oct), $4000 (Nov) 
  2. Stock purchases to be half the value of sales each month   
  3. Rent is paid every 2 months, starting in September. Each payment is $3000
  4. Utility bills are expected to be $750 a month
  5. Other expenses are expected to be $2500 per month

Initially, Richard knew the format would look something like below, be he had no clue how to complete the cash flow so he used the template below to set up his own!

QUESTIONS FROM CASH FLOW #1

  1. Define the term cash inflows [2]
  2. Use the information to construct a cash flow forecast for Richard [6]
  3. Explain two possible causes of the cash flow problem that Richard is experiencing [4]
  4. Explain two ways that Richard might be able to resolve his anticipated cash flow problems [4]

After looking at the cash flow forecast, Richard knew there was a problem! He could see there was a liquidity problem! He talked to a friend who was also a successful entrepreneur, and he got some advice! The advice was that Richard should look for ways to reduce his costs whilst increasing the number of revenue streams in order to improve his cash flow! 

Richard did some thinking, implemented the advice he had been given and came up with a new cash flow forecast.

CASH FLOW #2

Richard took his friends advice and decided to create a new forecasted cash flow. 

This time he would start with $15,000; he would reduce his costs by not renting a shop, but instead, working from home. Whilst this meant he would lose some sales; he had a plan! Instead of shop sales, he would try to boost his online sales with paid advertising. Richard would also increase his revenue streams by earning money from paid adverts on his website! He would also attend more conferences where he could sell his art. He would also attend schools to sell his time to train and deliver art-based courses to students. Finally, he would also tutor people and give private classes (individual and group classes). 

  1. Online sales for the first four months are forecast as $2500 (Aug), $3500 (Sept), $4000 (Oct), $4500 (Nov) 
  2. Revenue made from hosting paid adverts on his website would be $100 a month.
  3. Revenue from attending conferences would be $400 every other month, starting in August.
  4. School, private and group training would earn Richard $2000 a month each month. 
  5. Stock and materials purchases to be half the value of online sales per month.  
  6. Other expenses are expected to be $2500 per month.

QUESTIONS FROM CASH FLOW #2

  1. Use the new information above to construct a cash flow forecast for Richard [6]
  2. Comment on the liquidity position of Richard based on the cash flow forecast [4]

KEY TERMS FROM THE CASE

revenue streams

liquidity

entrepreneur

SUGGESTED ANSWERS TO THE CASH FLOW #1 AND #2

Unit 3.7 Cash flow #1 and #2

 

CASH FLOW #1

Define the term cash inflows [2]

Cash coming into a business within a given time frame
 
Use the information to construct a cash flow forecast for Richard [6]
 

See below!

Explain two possible causes of the cash flow problem that Richard is experiencing [4]

Firstly, Richard is experiencing a problem with the size of his net cash flow (the difference between inflows and outflows). They are imbalanced and too heavily weighted in terms of outflows! This creates a problem which becomes more serious each month

Secondly, it is possible that Richard mayy be able to improve his sales in the future, but in the short term, there is not enough money invested in the business to allow him to continue trading without the need for additional finance! He is already into negative cash flow by November!

Explain two possible solutions for Richards cash flow problems

Richard could delay starting to trade until he has sourced additional loan finance or saved more money to get him through the early stages of launching his business

Richard should investigate a larger number of streams of income to increase his inflows

Whilst at the same time, Richard should examine cutting costs or reducing his outgoings

Specifically, Richard could also cheaper suppliers for his materials

If none of these suggestions are practicable then Richard could investigate looking at his charging policy and see whether his prices are too low in relation to the market price.

 

CASH FLOW #2

Use the new information to construct a cash flow forecast for Richard [6]

See below

Explain the liquidity position of Richard based on the cash flow forecast [4]

The liquidity has improved remarkably, after taking his friends advice. There is a positive net cash flow every month from the start of trading

This positive flow stems from reducing costs, increasing revenue streams, but also starting with a much larger opening balance of $15,000