hey friends my name is zee and you're watching you miss easy and welcome to a new video for igcse business studies and today we have 5.2 for cash flow forecasting and working capital and by the end of the lesson you should be able to describe 5.2.1 the importance of cash and of cash flow forecasting and 5.2.2 the working capital so check out the ping comment for all the time stamps and don't forget to hit the like button and subscribe and ring the notification bell and move on to first one 5.2.1 the importance of cash and of cash flow forecasting starting with white cash is so important to a business cash is a liquid asset this means that it is immediately available for spending on goods and services and the cash flow of a business is to cash inflows and outflows over a period of time and essentially in business terms cash flow means like the flow of money into and out of a business over a certain time period if a business has too little cash or even runs out or like runs out of cash completely it will face major issues and problems such as number one being unable to pay the workers suppliers landlords and governments number two the production of goods and services will stop and workers will not be when that will not work for them for like no pay and suppliers will not supply goods if they're not paid and number three the business may be forced into liquidation which is selling up everything like the assets it owns to pay its debts then we have what is meant by cash flow and how can cash flow into a business or like cash inflow like the money received by a business and here are five most common ways like cash flow into a business number one the sale of products for cash number two the payments made by debtors and debtors are customers who have already purchased the products from the business but didn't pay for them at the time number three borrowing money from an external source and this will lead to cash flowing into the business and it will have to be repaid eventually number four the sale of assets of the business for example unwanted property and number five investors for example shareholders in the case of companies by putting more money into the business and then we have how can cash flow out of a business which is cash outflows and here are the five most common ways number one purchasing goods of all materials for cash paying wages salaries or any other expenses in cash purchasing non-current or fixed assets repaying loans and by paying creditors of the business which is like other firms which supply items in the business but were not paid immediately then we have the cash flow cycle which is right here and the following diagram will help to explain the link between some of the inflows and outflows which is the cash flow cycle and it explains why cash paid up is not returned immediately to the business so referring to this diagram i have this paragraph over here to like describe it the diagram shows how a cache is needed and one to pay for essential materials and other costs number two required to produce the product and time is needed to produce to produce the products so it's a typo time is needed to produce the product number three before they can be sold to the customer number four and if these customers receive credit they will not have to pay straight away but when they do pay for the goods in cash number five this money will be needed number one to pay for buying for like buying further material materials etc number two and so the cycle continues it's like a cyclical structure then we have more information and this diagram also helps us understand the importance of planning for cash flows for example number one if a business didn't have enough cash at stage one over here then not enough material and other requirements could be purchased and so outputs and sales would fall and if a business insisted on its customer paying cash at stage four because the business was short of money it might lose the customer to a competitor who could offer credits number three if a business had sufficient insufficient cash to pay its bills such as rent and electricity it would be in a liquidity crisis and it might be forced out of business by its creditors and these three examples illustrate the need for managers to plan ahead for their cash needs so that the business isn't put at risk in these ways then we have what cash flow is not and cash flow is not the same as profit because profit profit is a surplus after the total cost has been subjected from the revenue and there's a clear difference between the profit made by good hope this right here this clean study and the case study here and the cash flow over the same period never seen here so here's the question why is the cash flow lower than the gross profits and the answer is because because although all the goods have been sold cash payments buying a goods on your credit will pay in later months and this important example leads to further questions such as number one can profitable business businesses run out of cash and the answer is yes and this is the major reasons for business failing and it's called insolvency and how is this possible and it's possible by these ways right here number one allowing customers too long a credit period perhaps to encourage sales number two purchasing too much known credit or fixed asset at once number three expanding too quickly and keeping a very high inventory level this means that the cash is used to pay for higher inventory levels and this is often called over trading then we have the importance of cash flow forecasts and as mentioned without sufficient cash to pay bills and repay loans and business may be forced to like stop trading by its creditors and banks and the cash a cash flow forecast is an estimate of future cash inflows and outflows of a business and it's usually on a month to month basis this then shows expected cash balance at the end of each month and the cash flow forecast can be used to tell the manager how much test is available for paying bills repaying loans and for buying fixed assets and number two how much cash the bank might need to lend to the business in order to solve to avoid insolvency and number three whether the business is holding too much cash which could be put into a more profitable use then we have use of use of cash flow forecasts and cash flow forecasts are useful in the following situations number one starting up a business number two running an existing business number three keeping them at the bank manager informed and number four managing cash flow so here's a cash flow forecast right here we have that month by month basis we have inflows outflows opening bank balance net cash flow and closing bank balance so you notice that net cash flow is labeled as d and how you find net cash flow is where you do a minus b the inflows minus out minus outflows so in january it will be 25 000 minus 30 000 it's a positive 5 000 so you put it as 5 000. but in february the inflow is 45 000 and outflow is 65 000. so that's actually like a negative net cash flow and we put it in like a bracket like this and the positive net cash flow will increase like the closing bank balance by net cash flow closing bank balance you add it on to the opening bank balance like c plus d and a negative net cash flow as in february will reduce the bank balance you see negative it goes into like brackets and each closing bank balance becomes the opening bank balance for the next month see 15 000 50 000 and the bank account will overcome that will become overdrawn in february because there's a negative net cash flow and the negative like closing bank balance then we have the use of cash flow forecasts for la moines starting a business when planning to start a business the only the owner needs to know how much cash but will be needed for the first few months of operations and this is a very expensive time for new businesses as premises have to be purchased or rented and machinery must be purchased or hired and inventory must be built up and advertising and promotion cost would be necessary to make consumers aware of the product or service and number two we have keeping the bank manager informed banks provide loans to businesses however before bank managers will like lend any money they need to see that firm's cash flow forecast and this is particularly true for a new business and but also for an existing ones and the bank manager will need to see how big a loan or overdraft is needed when it is needed and how long the finance is needed for and what might what it might be repaid and it is very rare for a business sorry for a bank to land a business like money unless cash flow forecast is produced which shows that these factors which i've mentioned in the cash flow forecast like inflows outflows and bank balance and then we have managing and assisting business and in business can write out of cash and require an overdraft perhaps because of an expensive non-current or fixed asset being bought or fall in sales and borrowing like borrowing money from the bank or any other people needs to be planned in advance so that the lower interest rates can be arranged then we have managing cash flow too much cash held by the help in the bank account of a business means that this capital could be better used in other areas of the business and if it seems that the business is likely to have a very high bank balance the accountant could decide to pay off loans to help reduce interest charge another option would be to pay creditors quickly to take advantage of possible discounts and these are examples of actively managing the cash flow of a business then we have the cash flow forecast which i've mentioned just now at this cash flow forecast you can see the different labels a b c d e and how to find each of this and here's another example of a cash flow forecast and some activities where you can complete so if you do do these activities just comment your answers down below and i'll mark it but we'll move on to the next one how a short-term cash flow problem might be overcome and there are several ways in which a short-term cash flow problem could be overcome and these are explained below and the limitations of each method are outlined too number one we have increasing bank loans for methods of overcoming cash flow problem how it works is that bank will inject more cash into the business and limitations is that interest must be paid and loans have to be repaid eventually because you're borrowing from the bank number two delaying payments to suppliers how it works is that cash outflows decrease in the short term but suppliers could refuse to supply and supplies could offer lower discounts number three asking debtors to pay more quickly how it works is that cash inflows increase in the short term and customers may purchase from another business that allows credit for the limitations because uh yeah the business is asking the debtors to pay more quickly with cash or any other methods number four delaying or cancelling purchases of capital how it works is that the cash outflow small purchase of equipment decrease but limitations is that long-term efficiency of a business could decrease without modern equipment and then we have how a short term cash flow might be all that you might be overcome like more information in the longer term a business with cash flow difficulties will have to take other decisions to solve the problem this will include the following number one attracting new investors for example by selling more company shares but will this affect the ownership of a business and it might if you sell too much of a share to the public to like public or to other people so essentially the owner of a business should own at least 51 percent of the business company share in order to like gain like the control shift like control of the business and number two cutting costs and increasing efficiency but will this be popular with employees and produce quality be affected or product quality and number three in developing new products they will attract more customers this could take a long time and needs cash in the short term to pay for development and then we have 5.2.2 working capital and here's the concept of import at the concept and importance of working capital the term working capital refers to the amount of capital which is readily available to a business that is working capital is the difference between the resources in cash already convertible into cash and the short-term debts of a business so essentially working capital equals current assets minus current liabilities and working capital is a lifeblood of a business and no business can run effectively without a sufficient quantity of working capital and a business enterprise with an ample working capital is always in a position to take advantage of any variable opportunity either to buy raw materials being offered at a discount or to implement customers special order and working capital may be held in different forms and number one cash is needed to pay for day-to-day course and by inventories number two the value of a firm status is related to the volume of production and sale on and sales and to achieve higher sales there may be a need to offer additional credit facilities and number three the value of inventories is also a significant part of working capital and not having enough inventories may cause production to stop and on the other hand a very high invention level may result in high opportunity costs and lastly here's some definitions for 5.2 cash flow forecasting and working capital we have cash flow number one the cash flow of a business is the cash inflows and outflows over a period of time cash inflows cash inflows are the sums of money received by a buyer business during a period of time cash outflows on the other hand are the cash outflows like the sums of money paid out by a business during the period of time like in and out cash flow cycle a cash flow cycle shows the stages between like between paying out a cash for labor materials and so on and receive cash from the sales of goods then we have profit profit is a surplus after total costs have been subjected from the revenue and cash flow forecast is an estimate of future cash inflows and outflows of a business usually on the month by month basis this then shows the expected cash balance at the end of each month and net cash flow is the difference each month between inflows and outflows and negative net cash flow will be represented in a bracket in the cash flow forecast closing cash or bank balance is amount of cash held by business at the end of each month and this becomes the next month opening cash balance which brings us nicely to the opening cash or bank balance at last which is the amount of cash held by a business at the start of each month and then we have working capital and working capital is a capital available to a business in the short term to pay for day to day expenses and that's it for this video for 5.2 of igcse business studies but today we look into cash flow forecasting and working capital and if you find this video interestingly helpful please leave a like and subscribe and comment down below if you have any questions or criticisms also check out my instagram in the description for more daily content and if you enjoyed this video don't forget to hit the like button subscribe and ring the notification bell so that you don't miss out on any future videos and that's it for this review and i'll see you guys in the next video until then stay safe and happy learning