5.5 Cash flow

• Cash


  • A liquid asset
  • Physical cash or money in a bank account
• Importance of cash


  • Suppliers
  • If a supplier is not paid on time they may refuse to deal with the company in the future
  • Overheads
  • Fixed costs
  • e.g. gas, electric, admin, advertising
  • Employees
  • If employees are not paid they may :
  • Leave the business
  • Take legal action
  • Preventing business failure (insolvency)
  • If a business runs out of cash to pay everyone and can't raise finance, it may fail
• The Usefulness of Cash Flow Forecasting


  • Shows day-to-day budget
  • Shows where the business will have a shortfall of cash
  • Allows the business to organise short-term cash borrowing
  • May arrange an overdraft with their bank
• Limitations of Cash Flow


  • A business can have bad cash flow but still be profitable
  • Is only a forecast
  • Cash flow could be out of date
• Way to Reduce Shortfall in Cash


  • Inflows
  • Arrange an overdraft
  • Discount and promote to customers (more revenue)
  • Outflow
  • Cut costs
  • Use a cheaper supplier
• Opening balance


  • The cash available at the beginning of the month
• Closing balance


  • The cash available at the end of the month, carried onto the next month
• Cash flow forecast


  Diagram

  A) Cash inflows

  B) Cash outflows

  C) Net cash flow

  D) Opening

  E) Closing

  
• Closing balance


  • The sum of the month's net cash flow and the opening balance

  [ CLOSING BALANCE = NET CASH FLOW + OPENING BALANCE ]
• Net cash flow


  The difference between cash inflows and cash outflows during a month