Business Studies Activity: Cash Flow in a Shipbuilding Company


This is for use in KS 3 Business Studies

Why do this unit?

This unit will help students:

  • interpret simple cash flow statements
  • understand the importance of cash flow statements
  • identify solutions to cash flow problems

What does this unit do?

It provides a case study to let students complete some basic
cash flow forecasts, write the “story” accompanying a cash flow forecast, and
explain how they could alter their business idea to avoid a negative cash flow
forecast.

It also tests prior learning about cash flow and applies theory to forecasts, analysing consequences.

Resources:

Interactive whiteboard or data projector, PCs for pupils, printer.

Activities:

Starter:

In the "Would You Invest?" section of the website, students follow the link to the Northfleet Ship Building Company, and open “Prospectus & Financial Information”.

They are to complete the attached table by reading the Prospectus & Financial Information for 1865 only. The table looks at what the prospectus tells us about cash coming in and out of the company.

Hoped for Answers

Main activities:

A) North Fleet Six Month Cash Flow Forecast

In this activity, students look at a fictitious scenario based on the Northfleet Shipbuilding Company (which was in fact a real firm in which Barings considered investing).

In this scenario, for the first few months of being in business Northfleet has very little cash coming in - 20,000 from selling shares in January then no further income until May when one ship is sold for 10,000 and June when two more ships are sold for 20,000. However, it has cash flowing out of the business for payments such as materials and labour.

See Activity Sheet

Questions

1. Why is debt repaid at 708 per month? (2 marks)

2. Why is labour lower in January February and June? (2
marks

3. Explain why overheads might have increased during March April and May. (2 marks)

4. Work out the four missing figures. (4 marks)

5. Assuming all the figures above cannot be altered, suggest 3 ways the management team could avoid the negative monthly balances. Explain suggestions.(6 marks)

The answers to these questions are as follows:

Question

1. Why is debt repaid at 708 per month?

Northfleet had an agreement with the liquidators that they could pay 8500 p.a. = 708 p.m. (2 marks)

2. Why is labour lower in January February and June?

Shipbuilding not yet at full capacity, therefore fewer staff needed (2 marks)

3. Explain why overheads might have increased during March April and May.

Three ships now underway, so additional labour is needed. (2 marks)

4. Work out the four missing figures.

See highlights on spreadsheet (4 marks)

5. Assuming all the costs above cannot be altered, suggest three ways the management team could avoid the negative monthly balances. Explain you suggestions.

Three options are:

i. Overdraft facility or loan arranged with the bank to offset the negative months

ii. Request a deposit from the customers for the three ships thus giving cash in earlier

iii. Request a credit period with suppliers to pay at a later date, by which time revenue may be higher

(This last is quite a high level question and could be used as a differentiator.)

B) Solving cash flow problems

Students write a quick “story” to explain the example cash flow forecast.

They then amend the forecast using one, two or three of their suggestions from the previous question – i.e. adding in a loan and/or obtaining trade credit and/or obtaining a deposit from customers.

They then quickly jot down their new story – the effect the action has on the forecast.

Plenary/Homework

Students pitch to a bank manager using E2BN's “Make a Speech” software to thoroughly explain how they identified a problem by creating a forecast, and how their solution will overcome short term cash flow problems so the business can survive.

In writing this speech, analytical connectives should be used such as: "which may lead to", "resulting in", "this means that", "therefore meaning", "consequently", "should in turn", etc.

This will ensure that the students are able to understand and explain the consequences of cash flow problems and the benefits of making amendments.

First draft, showing the original cash flow forecast

An example of a second draft, showing deposit in advance, loan with repayments, trade credit obtained.

(Higher achievers should pick up that an overdraft may still be needed as well.)

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