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bought…in goods sell on for ￡60；000。
On the basis of the above assumptions it is possible to make the cashflow
forecast set out in Table 1。4。 It has been simplified and some elements
such as VAT and tax have been omi。。ed for ease of understanding。
The maths in the table is straightforward； the cash receipts from various
sources are totalled； as are the payments。 Taking one from the other leaves
a cash surplus or deficit for the month in question。 The bo。。om row shows
the cumulative position。 So； for example； while the business had ￡2；450
cash le。。 at the end of April； taking the cash deficit of ￡1；500 in May into
account； by the end of May only ￡950 （￡2；450 – ￡1；500） cash remains。
Overtrading
In the example above； the business looks like having insufficient cash；
based on the assumptions made。 An outsider； a banker perhaps； would
look at the figures in August and see that the faster sales grew the greater
the cash…flow deficit became。 We know； using our crystal ball； the position
will improve from September and that if we can only hang on in there for
a few more months we should eliminate our cash deficit and perhaps even
have a surplus。 Had we made the cash…flow projection at the outset and
raised more money； perhaps by way of an overdra。。； spent less on fixtures
and fi。。ings； or set a more modest sales goal； hence needing less stock and
advertising； we would have had a sound business。 The figures indicate a
business that is trading beyond its financial resources； a condition known
as overtrading； anathema to bankers the world over。
Table 1。4 High Note six…month cash…flow forecast
Month April May June July Aug Sept Total
Receipts
Sales 4；000 5；000 5；000 7；000 12；000 15；000
Owners’ cash 10；000
Bank loan 10；000
Total cash in 24；000 5；000 5；000 7；000 12；000 15；000 48；000
Payments
Purchases 5；500 2；950 4；220 7；416 9；332 9；690 39；108
Rates； electricity； heat；
telephone； internet etc
1；000 1；000 1；000 1；000 1；000 1；000
Wages 1；000 1；000 1；000 1；000 1；000 1；000
Advertising 1；550 1；550 1；550 1；550 1；550 1；550
Fixtures/fi。。ings 11；500
puter etc 1；000
Total cash out 21；550 6；500 7；770 10；966 12；882 13；240
Monthly cash
Surplus/deficit（–） 2；450 （1；500） （2；770） （3；966） （882） 1；760
Cumulative cash balance 2；450 950 （1；820） （5；786） （6；668） （4；908）
Accounting 27
Cash…flow spreadsheet
You can do a number of ‘what if’ projections to fine…tune cash…flow
projections using a spreadsheet： Business Link （businesslink。
gov。uk/Finance_files/Cash_Flow_Projection_Worksheet。xls） has a cashflow
spreadsheet that you can copy and paste into an Excel file on your
puter。
Statement of cash flows for the year
A cash…flow statement summarizes exactly where cash came from and how
it was spent during the year。 At first glance it seems to draw on a mixture
of transactions included in the profit and loss account and balance sheet for
the same period end； but this is not the whole story。 Because there is a time
lag on many cash transactions； for example tax and dividend payments；
the statement is a mixture of some previous year and some current year
transactions； the remaining current year transactions go into the following
year’s cash…flow statement； during which the cash actually changes hands。
Similarly； the realization and accrual conventions relating to sales and
purchases respectively result in cash transactions having a different timing
to when they were entered in the profit and loss account。
Example
A pany had sales of ￡5 million this year and ￡4 million last year and
these figures appeared in the profit and loss accounts of those years。 Debtors
at the end of this year were ￡1 million and at the end of the previous year
were ￡0。8 million。 The cash inflow arising from sales this year is ￡4。8 million
（￡0。8 million ＋ ￡5 million – ￡1 million） whereas the sales figure in the profit
and loss account is ￡5 million。
For these reasons it is not possible to look at just this year’s profit and loss
account and balance sheet to find all the cash flows； you need the previous
year’s accounts too。 The balance sheet will show the cash balance at the
period end but will not easily disclose all the ways in which it was achieved。
piling a cash…flow statement is quite a technical job and some training
plus inside information is needed to plete the task。 Nevertheless； the
bulk of the items can be identified from an examination of the other two
accounting statements for both the current and previous years。
From an MBA perspective it is understanding the requirement for a
cash…flow statement as well as the other two accounts that is important；
as well as being able to interpret the significance of the cash movements
themselves。
28 The Thirty…Day MBA
Straight Plc
The un…audited condensed cash…flow statement for Straight Plc； which was
established in 1993 as a supplier of container solutions for source…separated
waste； is shown in Table 1。5。 Initially one man and a desk； the pany
grew to bee the UK’s leading supplier of kerbside recycling boxes
as well as a key supplier of other types of waste and recycling container
solutions。 Turnover by 2008 was running at over ￡30 million a year； with
operating profit in excess of ￡1m。
The three columns represent the cash activities for two equivalent sixmonth
periods and for the whole of the preceding year。 The cash of ￡2；126
thousand generated to 31 December 2006 （bo。。om of the right…hand column）
is carried over to the start of the June 2007 six…month period （second figure
from bo。。om of le。。…hand column）。 By adding the net increase （or decrease）
in cash generated in this period we arrive at the closing cash position。
The cash…flow statement then gives us a plete picture of how cash
movements came about： from normal sales activities； the purchase or
disposal of assets； or from financing activities。 This is an expansion of the
sparse single figure in the pany’s closing balance sheet stating that cash
in current assets is ￡3；751 thousand。
THE PROFIT AND LOSS ACCOUNT
（INE STATEMENT）
If you look back to the financial situation in the High Note example you
will see a good example of the difference between cash and profit。 A。。er all；
the business has sold ￡60；000 worth of goods that it paid only ￡30；000 for；
so it has a substantial profit margin to play with。 While ￡39；108 has been
paid to suppliers； only ￡30；000 of goods at cost have been sold； meaning
that ￡9；108 worth of instruments； sheet music and CDs are still in stock。 A
similar situation exists with sales。 We have billed for ￡60；000 but been paid
for only ￡48；000； the balance is owed by debtors。 The bald figure at the end
of the cash…flow projection showing High Note to be in the red to the tune
of ￡4；908 seems to be missing some important facts。
The difference between profit and cash
Cash is immediate and takes account of nothing else。 Profit； however； is
a measurement of economic activity that considers other factors that can
be assigned a value or cost。 The accounting principle that governs profit
is known as the ‘matching principle’； which means that ine and expenditure
are matched to the time period in which they occur。 （Look back
to earlier in the chapter where realization and accruals are explained。）
Table 1。5 Un…audited condensed cash…flow statement for Straight Plc （for the 6 months ended 30 June 2007）
Half year to
30 June 2007
Half year to
30 June 2006
Year
31 Dec 2006
￡’000 ￡’000 ￡’000
Net cash flows from operating activities 2；242 3；879 1；171
Cash flows from investing activities
Purchases of property； plant and equipment （603） （464） （701）
Proceeds from sale of property； plant and equip 345 – –
Purchase of intangible assets （55） （87） （193）
Purchase of investments （35） – –
Interest received 28 58 107
Net cash used in investing activities （320） （493） （787）
Cash flows from financing activities
Dividends paid （310） （283） （422）
Proceeds from issue of shares 13 – 128
Net cash used in financing activities （297） （283） （294）
Net increase in cash and cash equivalents 1；625 3；103 90
Cash and cash equivalents at beginning of period 2；126 2；036 2；036
Cash and cash equivalents at the end of period 3；751 5；139 2；126
30 The Thirty…Day MBA
So for High Note the profit and loss account for the first six months would
be as shown in Table 1。6。
The structure of the profit and loss statement
This account is set out in more detail for a business in order to make it more
useful when it es to understanding how a business is performing。 For
example； although the profit shown in our worked example is ￡8；700； in
fact it would be rather lower。 As money has been borrowed to finance cash
flow there would be interest due； as there would be on the longer…term loan
of ￡10；000。
In practice we have four levels of profit：
。 Gross profit is the profit le。。 a。。er all costs related to making what you
sell are deducted from ine。
。 Operating profit is what’s le。。 a。。er you take away the operating
expenses from the gross profit。
。 Profit before tax is what is le。。 a。。er deducting any financing costs。
。 Profit a。。er tax is what is le。。 for the owners to spend or reinvest in the
business。
For High Note this could look much as set out in Table 1。7。
A more substantial business than High Note will have taken on a wide
range of mitments。 For example； as well as the owner’s money； there
may be a long…term loan to be serviced （interest and capital repayments）；
parts of the workshop or offices may be sublet； generating ‘non…operating
Table 1。6 Profit and loss account for High Note for the six months Apr–
Sept
￡ ￡
Sales 60；000
Less cost of goods to be sold 30；000
Gross profit 30；000
Less expenses：
Heat； electric； telephone； internet etc 6；000
Wages 6；000
Advertising 9；300
Total expenses 21；300
Profit before tax； interest and depreciation charges 8；700
Accounting 31
ine’； and there will certainly be some depreciation expense to deduct。
Like any accounting report； it should be prepared in the best form for the
user； bearing in mind the requirements of the regulatory authorities。 The
elements to be included are：
1。 sales （and any other revenues from operations）；
2。 cost of sales （or cost of goods sold）；
3。 gross profit – the difference between sales and cost of sales；
4。 operating expenses – selling； administration； depreciation and other
general costs；
5。 operating profit – the difference between gross profit and operating
expenses；
6。 non…operating revenues – other revenues； including interest； rent； etc；
7。 non…operating expenses – financial costs and other expenses not directly
related to the running of the business；
8。 profit before ine tax；
9。 provision for ine tax；。
10。 net ine （or profit or loss）。
Profit and loss spreadsheet
There is an online spreadsheet at SCORE’s website （score 》
Business Tools 》 Template Gallery 》 Profit and Loss）。 Download in Excel
format and you have a profit and loss account with 30 lines of expenses； the
headings of which you can change or delete to meet your particular needs。
Table 1。7 High Note extended profit and loss account
￡s
Sales 60；000
Less the cost of goods to be sold 30；000
Gross profit 30；000
Less operating expenses 21；300
Operating profit 8；700
Less interest on bank loan and overdra。。 600
Profit before tax 8；100
Less tax 1；827
Profit a。。er tax 6；723
32 The Thirty…Day MBA
THE BALANCE SHEET
A balance sheet is a snapshot picture at a moment in time。 On the one hand
it shows the value of assets （possessions） owned by the business and； on
the other； it shows who provided the funds with which to finance those
assets and to whom the business is ultimately liable。
Assets are of two main types and are classified under the headings
of either fixed assets or current assets。 Fixed assets e in three forms。
First； there are the hardware or physical things used by the business itself
and which are not for sale to customers。 Examples of fixed assets include
buildings； plant； machinery； vehicles； furniture and fi。。ings。 Next e
intangible fixed assets； such as goodwill； intellectual property etc； and these
are also shown under the general heading ‘fixed assets’。 Finally there are
investments in other businesses。 Other assets in the process of eventually
being turned into cash from customers are called current assets； and include
stocks； work in progress； money owed by customers and cash itself。
Total assets = Fixed assets ＋ Current assets
Assets can only be bought with funds provided by the owners or borrowed
from someone else； for example bankers or creditors。 Owners provide funds
by directly investing in the business （say； when they buy shares issued by
the pany） or indirectly by allowing the pany to retain some of
the profits in reserves。 These sources of money are known collectively as
liabilities。
Total liabilities = Share capital and reserves ＋ Borrowings and other creditors
Borrowed capital can take the form of a long…term loan at a fixed rate of
interest or a short…term loan； such as a bank over