CLFIN/019

IBS Center for Management Research

 
 
 

Cash Flow Classification and Analysis for Decision Making

This caselet was written by Nagendra Kumar M V and Indu Perepu, IBS Hyderabad. It was compiled from generalised
experience, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.

© 2020, IBS Center for Management Research. All rights reserved.

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CLFIN/019

Cash Flow Classification and Analysis for Decision

Making
INTRODUCTION
Amit had successfully run his café business “Amit Traditional Hot Beverages (ATHB)” for three
months. It was the start of a new financial year (2019-20) and he was doing short-term planning
for another three months. He had a fixed deposit account that he had maintained for ATHB and he
withdrew the money from that and placed it in the current account (The total amount withdrawn
included interest of Rs.5,000). In addition, he also introduced another Rs. 500,000 into the
business and placed that amount in government bonds that were encashable to their full value at
any point of time.
Amit was confident about improving sales margins over the next three months and he asked the
Supervisor and mentor of the food making and serving section at ATHB, Rama Rao (Rao), to
make preparations accordingly. Amit wanted an improvement of 10% in sales margins every
month for the next three months.
Besides, he also wanted to gain contracts to supply tea/coffee and snacks to offices located in the
areas surrounding the café. He planned to incur an additional expenditure of Rs. 50,000 on
advertising and marketing.
But before going ahead with his idea, Amit wanted to know the actual cash balance lying with him
and then take a decision on managing the expenses depending on the expected sales margins.

BACKGROUND
Rao was a small-time tea shop owner in a small town in the Southern part of India. He made unique
blends of teas and coffees and sold them at reasonable prices. His tea and coffee had a large and loyal
following in his town. Though he had been working hard for a long time, his business had not shown
much growth. His activities were confined only to that particular town and he earned a small profit,
just enough to make ends meet. Rao was slowly becoming aware of recent advancements in the café
business and the scope for modern beverage retail outlets. Though he wanted to develop his business
further, he could not do so as his financial resources were limited. One day, Amit, who was from an
affluent business family, visited Rao’s shop along with a friend. Amit, who hailed from a bustling
metropolitan city 100 kilometers away from the town in which Rao operated, was awed by the
different types of tea and coffee served by Rao at down to earth prices.
Amit met Rao and told him that there was a growing demand in the city for just the kind of
beverages he was making. He prodded him to start a unit with modern equipment in his city and
asked him to come up with more offerings based on his experience. In addition to offering tea and
coffee, Amit also suggested that the outlet could sell snacks at reasonable prices to attract
youngsters as well as middle aged working professionals in the city.
However, Rao expressed his inability to venture out of his town due to personal commitments and
financial constraints. But Amit promised Rao that he would provide the necessary financial
support to start the café and managed to convince him to go along with him to start the café in the
city. Amit also told Rao that he would pay him a regular salary, which was more than double the
amount he was earning through his shop in the small town.

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  Cash Flow Classification and Analysis for Decision Making

Amit asked Rao to work as a supervisor in the café, and to guide the people in making and serving
tea, coffee, and snacks. Rao was finally convinced that it was a good opportunity and he accepted
Amit’s offer and decided to work with him in the city.

STARTING THE FIRST BRANCH

After getting back to his city, Amit discussed his idea with his father and requested him to provide
financial assistance. His father agreed and gave him Rs. 1.5 million to start the café business. Both
Amit and Rao discussed what equipment would be necessary to start the business. Rao gave some
suggestions based on his experience. Amit, meanwhile, had done some research and talked to
acquaintances in the business to identify different contemporary equipment that would be helpful
in launching an innovative café business.
Amit rented space in a prime location in the city, which was surrounded by several offices and
educational institutions. The rent was Rs. 25,000 per month. He paid a refundable advance of
Rs.0.20 million to the shop owner. He also consulted some of the best interior designers who
created a good ambience for the café. The consultation and designing charges worked out to Rs.
0.10 million. The other furniture and equipment cost around Rs. 0.30 million.
Amit also incurred other miscellaneous expenditure of Rs. 50,000 on establishing the business
unit. He hired 3 supporting staff and 2 serving staff who were to be monitored by Rao. Each of
them was paid a salary of Rs.5,000 per month. As promised, Amit offered Rao Rs. 25,000 as
salary to work as a mentor who would train and monitor the staff and manage the items that were
offered on the menu.
After making all the arrangements, Amit successfully started the business in January 2019 and
named it Amit Traditional Hot Beverages (ATHB). Amit incurred an additional expenditure of Rs.
0.10 million on marketing and advertising. He also drew up a plan to expand the business to other
locations in the city. However, he wanted to see how the first café fared before putting his plan
into action.

COMMENCING THE OPERATIONS

After meeting all the initial expenses required to establish the unit, Amit was left with Rs. 0.75
million before operations commenced. It was estimated that Rs. 150,000 would be incurred as
operational expenditure per month. Amit was constantly guided by his father in managing the
financial resources.
Amit’s father advised him to put Rs. 600,000 into the current account to meet operational expenses
and the remaining in a three-month fixed deposit in the bank. Amit also placed the order for raw
materials as requested by Rao for a value of Rs. 50,000 during the first month of launching
operations.
In the first month, Amit and Rao planned to offer a limited number of items. They thought they
would add more items to the menu based on the response. The business slowly began attracting
youngsters and middle-aged working professionals in the vicinity.
The response was good for the different types of tea and coffee beverages and also for the snacks.
The customers were especially satisfied with the prices which they found to be much lower than
the prices charged by national and global coffee chains that were operating in the area. For
example, a cup of normal tea/coffee was served in the price range of Rs. 5 to Rs. 15 and snacks
like samosa, puffs, onion pakoda, etc., were priced between Rs. 10 and Rs. 25 as compared to
Rs.20 to Rs.40 for tea and coffee and Rs. 25 to Rs.50 for snacks charged by other cafés.

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  Cash Flow Classification and Analysis for Decision Making

In the first month, sales were satisfactory at Rs. 25,000 and were expected to increase by another
Rs. 30,000 during the second month. The first three months’ sales and expenses of ATHB were as
follows:
Table-1: First three Months’ Sales and Expenses of ATHB

Particulars January 2019 February 2019 March 2019

Sales Rs.25,000 Rs.55,000 Rs.60,000
Salary to Supervisor Rs.25,000 Rs.25,000 Rs.25,000
Salaries of Supporting Staff Rs.25,000 Rs.25,000 Rs.25,000
Shop Rent Rs.25,000 Rs.25,000 Rs.25,000
Purchase of Raw Material Rs.50,000 Rs.65,000 Rs.70,000
Other Miscellaneous expenses Rs.5,000 Rs.8,000 Rs.7,000
Source: Prepared by Author

Amit paid all the expenses for the three-month period. For the purchase of raw materials, he paid
Rs. 50,000 in the month of March 2019.
Note: The preparation of cash flow statement is not mandatory for a small, medium scale
enterprise and for a sole trading business or for any partnership business. But the preparation of a
cash flow statement and the cash flow analysis is mandatory for companies registered under the
Companies Act, 2013.
However, considering the importance of cash flow analysis for both the management and other
stakeholders, it is advisable, and in some cases, essential to prepare a cash flow statement for any
kind of business entity.
The present case study can be analyzed from the perspective of understanding the concept of cash
flows and the purpose of preparing a cash flow statement and not from the perspective of the form
of organization or as a regulatory requirement. The present case study helps to understand the
concepts of cash flows, classification of cash flows, and the necessity of preparing a cash flow
statement. Analyze the following discussion questions based on guidelines provided in the
Accounting Standard-3 (Cash flow Statements)

DISCUSSION QUESTIONS

1. What are Cash flows and Cash Equivalents? How did Amit assess the availability of cash?
2. What do you mean by cash flows from operating activities? Identify and classify the cash
flows from the operating activities of Amit Traditional Hot Beverages (ATHB).
3. What do you mean by cash flows from financing activities? Identify and classify the cash
flows from the financing activities of Amit Traditional Hot Beverages (ATHB).
4. What do you mean by cash flows from investing activities? Identify and classify the cash
flows from the investing activities of Amit Traditional Hot Beverages (ATHB).

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