5.5 Cash flow

    Cards (10)

    • 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      • Cash flow could be out of date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