37655 37495 37655 37495 50726 50202 126036 125192 Income less

Expenditure 1945 293 1945 293 -1226 -2967 2664 -2381 0 1945 293 3890 586 Closing Bank Balance 1945 293 3890 586 2664 -2381

The first thing you might have looked at is the figures at the bottom of the page - the closing bank balance at the end of each month compared to the budgeted figures. You immediately see that the cash flows are not as good as predicted and that by the end of the third month when VAT has to be paid there is a negative balance of Rs. 238,100 compared with a budgeted surplus of Rs. 266,400 - the pendulum seems to have swung completely the other way. It is necessary therefore to examine the cash flows more closely in an attempt to identify the reason for this variance.

The initial cash flow showed no requirement for overdraft facilities - this is a cash business. Now an overdraft is required, if only to allow the VAT bill to be paid. Is there security available to cover this? If the loan to buy the business was a large one, it is unlikely that there is any available security cover for overdraft facilities as well.

There are other concerns. If it looks as if the club is not going to pay its way, there is no point in lending more money to it. This might only give the bank a greater debt to try to collect in the future - if it can be collected at all. What we need to do here is closely examine the actual figures in the cash flow both on the income and expenditure side to see if we can identify any particular area where either income or costs have been well out of line with the budget. This being the case, it may be possible to discuss how to bring them back into line.

The income side

There is no significant difference here. We can see that all areas are not quite up to budget. Remembering that the figures were based on forecast attendances, they are in fact out by less than 5%. This is not a great deal and, in most circumstances, if a business could produce a cash flow at the start of an enterprise with this degree of accuracy, you would be quite pleased with it. However, the signs are there to be watched - income is not as good as planned. Will it get better or will it get worse?

The expenditure side

Again there is nothing on the expenditure side which stands out as being well outside what was planned. The total is in fact down by Rs. 16,000. However, this hides a number of cost increases and, in reality, if all costs had been controlled to their predicted amounts, then total expenditure in January and February should have been lower by Rs. 65,800 and by Rs. 82,200 in March. This is because bar and food costs are related to their sales figures. If these sales change on the income side, there should also be a change on the expenditure side

This is a point worth remembering and when presented with a cash flow which has this type of relationship. You should always ensure

Lending: Products, Operations and Risk Management | Reference Book 1

that the actual figures relate in the same way as the figures presented in the budget. In the case of “Underground” they do, considering the size of the turnover and the fact that these two figures represent over 70% of income. Apart from this, all the other figures are up, but again only by a small amount. The net result is to turn what appeared to be a business with a positive cash flow into one which is going to require overdraft facilities possibly for some time to come.

Before granting any overdraft facility, you will want to ensure two things: • is security available to cover the overdraft and is this acceptable to

thebank?

• what measures are being planned by the owner to try to improve the situation in the coming months?

Assuming that you get satisfactory answers to these two questions, you may be willing to grant overdraft facilities.

Summary

Cash flow projections are necessary to show how much cash will come into and go out of a business over a period of time. This can be confirmed by looking at the turnover figures in the bank account which also show how well a business has done in the past and give an indication of its future prospects, at least as far as cash flow is concerned. This is no small matter - if a business has no cash, it cannot pay its bills and the creditors are just as likely as the bank to want their money back. They can refuse to supply goods on credit, and if the bank is refusing to meet any cheques, effectively the business cannot operate and bankruptcy looms ahead.

By keeping a careful eye on a business you may not only prevent it going too far down the road of having cash flow problems, but you may also prevent your own bank from having to take the necessary legal action to recover a debt - something which you, the customer and the bank do not want to happen.

Adapted from:

Credit Lending Module and Specialized Lending Book- One of Chartered Banker Institute.

Lending: Products, Operations and Risk Management | Reference Book 1 117 Introduction:

Risk analysis and assessment