5.5 Cash and cash flow

• Cash


  Notes and coins held by the business plus money it has in its bank accounts
• Importance of cash to a business

  Provides liquidity and enables a business to meet its short term debts/expenses e.g. material costs, wages, power and rent
• Profit


  Total revenue a business recieves minus total costs of production
• Liquidity


  Ability of a business to pay its short term debts
• Positive cash flow


  A forecast that there will be more cash coming into the business than going out
• Negative cash flow


  A forecast that there will be more cash going out of the business than coming in
• Usefulness of cash flow forecasts for planning tool


  A cash flow forecast is a plan which helps a business know if it has liquidity.

  A bank manager who can look at a detailed cash flow forecast is more likely to give a business a loan especially if positive cash flow.
• Usefulness of cash flow forecasts for anticipating periods of cash shortages


  A cash flow forecast might show that business will have a cash shortage at some point - indication that it will not have liquidity. By being aware, can plan to deal with this
• Usefulness of cash flow forecasts for dealing with a cash flow shortage when the business has a negative cash flow (no liquidity)


  Shortage can be dealt by :

  • arranging for finance (usually overdraft but has interest) so business can still pay bills during period of shortage to continue to produce
  • trying to reduce spending or increase revenue to avoid the shortage
• Usefulness of cash flow forecasts for providing targets 


  A business may decide to set a target for cash held so that it knows it can pay its bills during a period when cash flow will be negative
• Cash flow forecast


  A statement showing expected flow of money into and out of a business over a period of time
• How cash flow statement drawn up

  1. Cash that flows in is added up and total for each month is put in the "total inflow"
  2. Cash that flows out is added up and total for each month is put in "total outflow"
  3. Net cash outflow found by deducting total outflow from inflow. Opening balance states amount of cash business has at start of month
  4. Net cash outflow added to opening balance to if positive or deducted if negative. This gives closing balance of that month - opening of next month.
• Net cash flow


  Total inflow of cash - total outflow
• Opening balance


  Amount of cash available at the beginning of the month. Closing balance for previous month.
• Closing balance


  Amount of cash left at end of the month. Opening balance for next month.