321 Importance of cash.pptx

3.2.1 The importance of cash to a business You will need worksheet 3.2.1 for this lesson Lesson objectives The importance of cash to a business: to pay suppliers, overheads and employees to prevent business failure (insolvency) the difference between cash and profit. Starter How imp...

3.2.1 The importance of cash to a business You will need worksheet 3.2.1 for this lesson Lesson objectives The importance of cash to a business: to pay suppliers, overheads and employees to prevent business failure (insolvency) the difference between cash and profit. Starter How important is cash to you at the moment? Critical Very important Important, but I have other priorities Not important to me at all Cash to pay suppliers overheads and employees Definition: Cash-flow A cash flow forecast is a report that shows the expected movement of cash in and out of a business during a period of time (usually a year) The cash flow forecast should be included as part of a business plan Importance of cash: To pay suppliers Suppliers are those businesses which supply the business with stock or other supplies e.g. raw materials If the business has low cash it cannot pay the suppliers This will damage relationships with suppliers This could result in the business not having enough raw materials to continue production Importance of cash: To pay overheads Overheads are costs of a business that do not directly contribute to the cost of making the product or performing the service Overheads might include: A. Administration costs of the business B. Accounting costs of the business C. Business Insurance D. Utility bills for the business e.g. gas bill / electricity bill / water bill E. Advertising costs Are advertising costs also overhea Importance of cash: To pay employees If a business has low cash it may not be able to pay its employees If the business cannot pay the employees then they may decide to leave the company This would increase the labour turnover of the business Employees might leave if they are not pa Why would this increase the costs of Cash to prevent business failure Importance of cash: To prevent business failure (insolvency) ‘Cash is king’ is an expression some business people may use, this is a way of showing how important it is A business needs to make sure that its invoices are paid on time, and that it has cash to pay its own suppliers If a business runs out of cash it may fail or become insolvent The difference between cash and profit What is cash? Cash is money coming in and going out of a business on a day-day basis Cash is the lifeblood of any business and is more important in the short run to pay for For example: A. Stock of products B. Raw materials C. Computing equipment D. Clothing E. Wages of staff This will enable the business to operate or remain ‘solvent’ Is this cash? What is profit? Profit is equal to total revenue minus total costs, where P = TR- TC Profit is expressed as a value for example £2,000 Lower profits have an impact on share price, making the business less attractive to investors To improve profitability a business must either increase its revenue or reduce their costs The difference between cash and profit (summary) Profit: Total revenue minus total costs in a business, or what is left once all the bills have been paid (Profit = TR – TC) Cash: money available in the business to pay the bills, cash may not come in the same month as it goes out Identify 3 ways that a business could take payment Plenary Quiz Fill in the gaps, this text is about the disadvantages of having low levels of cash: A business with low levels of cash may not be able to pay _______________. This would damage relationships with suppliers, which means the business may not have sufficient levels of raw ______________. A business may not be able to pay its ________________ wages or salaries. This is bad because employees may leave the business to find ________________ elsewhere. This will lead to increased labour _____________. Plenary Quiz Answers A business with low levels of cash may not be able to pay suppliers. This would damage relationships with suppliers, which means the business may not have sufficient levels of raw materials. A business may not be able to pay its employees wages or salaries. This is bad because employees may leave the business to find work elsewhere. This will lead to increased labour turnover. Sample question 1 Answer question 1 Case study for sample question 2 Sample question 2 AO2 AO3 3 3 MARKS MARKS Answer question 2