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Paper 2
Unit 5 - Finance
5.5 Cash flow
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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out of date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
5
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