cash flow and revenue

• Cash flow

  All the money coming in and going out of the business
• Cash inflows

  Money that comes into the business
• Cash outflows

  Money that goes out of the business
• Profit

  The positive difference between revenues and costs
• Loss

  When costs are greater than revenues
• Investment (in IB business management)

  The purchase of non-current assets that generate future earnings
• A business can be profitable

  Yet have negative cash flow
• A business may be not profitable

  Yet have positive cash flow
• Investment in the short term

  Is usually a cash outflow
• Investment in the long term

  Can generate cash inflows
• Investment in the short term

  Profits might be lower
• Investment in the long term

  Can increase profits if successful
• Cash flow forecast


  A document that shows predicted movement of cash in and out of the business for a specific time period
• Cash flow statement

  The same as cash flow forecast but using real past data
• Purpose of cash flow forecast

  • To anticipate when there may be cash deficiency and take measures to avoid insolvency
  • To compare forecast with actual data to assess accuracy of predictions and understand cash movements
• Elements of cash flow forecast

  1. Opening balance

  2. Cash inflows

  3. Cash outflows

  4. Net cash flow

  5. Closing balance
• Negative numbers in financial statements are shown in brackets
• Net cash flow has to be positive in the long term to sustain business operations and avoid insolvency
• The formula for closing balance is opening balance plus net cash flow
• Cash outflows

  Money going out of the business, usually expenses such as wages, tax, purchase of stock, creditors, advertisement costs, interest payments, dividends, etc.
• Net cash flow

  The difference between cash inflows and outflows
• Net cash flow has to be positive in the long term to sustain business operations and be solvent
• Closing balance

  The amount of cash available at the end of the trading period
• Formula for closing balance

  Opening balance + net cash flow
• Cash flow and liquidity are related but not the same
• Liquidity

  Measured using current ratio and acid test ratio, shows how liquid a business is at a specific point in time
• Cash flow

  Shows the monthly movement of cash in and out of a business
• Cash flow forecast is for the future, liquidity ratios are for the past
• Working capital

  Capital or money used for daily business operations
• Strategies to deal with cash flow problems

  • Increase cash inflows
  • Decrease cash outflows
• Strategies to increase cash inflows

  1. Decrease trade credit period

  2. Debt factoring

  3. Overdraft

  4. Sale and lease back
• Decreasing trade credit period

  • Pros: Get cash payments earlier, improve working capital

  Cons: May damage relationship with debtors, risk of bad debts
• Debt factoring

  • Pros: Get cash quickly

  Cons: Don't get full debt back, have to pay fee to debt factor
• Overdraft

  • Pros: Easy to obtain, get cash instantly

  Cons: High interest rates if payments delayed
• Sale and lease back

  • Pros: Get a lot of cash upfront

  Cons: No longer own the asset, have to make monthly lease payments
• Strategies to decrease cash outflows

  1. Delay payments to creditors

  2. Find cheaper suppliers

  3. Better control of expenses

  4. Hire purchase

  5. Avoid buying non-current assets

  6. Improve stock control
• Delaying payments to creditors

  • Pros: Hold onto cash longer

  Cons: May damage supplier relationships, they may demand higher prices
• Finding cheaper suppliers

  • Pros: Spend less cash

  Cons: Cheaper suppliers may mean lower quality
• Better control of expenses

  • Pros: Decrease cash outflows

  Cons: May demotivate staff or decrease brand awareness
• Hire purchase

  • Pros: Reduce one-off cash outflow, spread payments

  Cons: Higher total price, increased monthly payments