Poor cash flow is the reason why many businesses eventually fail
Even when trading conditions are good, businesses can fail if they do not have enough cash to pay immediate bills
Reasons businesses need cash
To pay suppliers
To pay overheads
To pay employees
Cash
The most liquid of all business assets, consisting of notes, coins, and money in the bank
Profit
Different from cash, as some goods are sold on credit, owners may put more cash into the business, and purchase of fixed assets reduces cash balance but not profit
Cash inflow
Money entering a business, such as sales revenue, loans, fresh capital, interest, and sale of assets
Cash outflow
Money going out of a business, such as wages, materials, utilities, machinery, rent, and tax
Net cash flow
The difference between cash inflows and cash outflows
A positive net cash flow means more cash flows in than flows out, while a negative net cash flow means a business may have to borrow money
Calculating net cash flow for Aga Brick Making
Cash inflows - Cash outflows
The net cash flow calculation shows whether the business has enough cash to operate
Importance of cash flow forecasting
Helps identify cash shortages in advance
Supports applications for funding
Helps with business planning
Allows monitoring of actual vs. forecast cash flow
Businesses of all sizes have to monitor their cash flow carefully, as both large and small businesses can collapse if they run out of cash
Large businesses can cause cash flow problems for small businesses by delaying payment, and some governments have taken measures to limit this practice
