Cash Flow

• Cash flow

  The way that money moves in and out of a business and its bank accounts
• The management of cash and cash flow is important as it can prevent a business from failing
• Failing to manage cash and cash flow

  Can cause business failure
• A business has negative cash flow


  More money going out (outgoings) than money coming in
• Instances when a business can suffer cash flow problems

  • At start-up
  • During rapid growth
• Customers not paying what they owe

  Business may be unable to pay its own bills and may become insolvent
• Positive cash flow

  More money comes in to the business than goes out
• Steps to get out of negative cash flow

  1. Negotiate an overdraft facility

  2. Keep costs under control

  3. Keep cash coming into the business by arranging sensible credit arrangements with suppliers and customers, and having fewer customers who pay for products and services on credit
• Businesses need positive cash flow to reduce the risk of failure and insolvency
• Cash flow

  The way that money moves in and out of a business and its bank accounts
• The management of cash and cash flow is important as it can prevent a business from failing
• Profit

  The amount of money made after all costs are deducted from all revenue
• Not all cash paid into a business

  Is profit
• A business must pay its costs from the money that comes into it
• Calculating profit monthly can help a business by showing that it is solvent and indicating whether it will be able to achieve its profit targets
• Profit is usually calculated on an annual basis
• Cash flow

  The way that money moves in and out of a business and its bank accounts
• Cash flow forecasting

  • Predicting the future flow of cash in and out of a business' bank accounts
  • Usually for a 12-month period
• Businesses that need cash flow forecasting

  • New businesses
  • Fast-growing businesses
  • Businesses with unpredictable sales patterns (e.g. seasonal businesses)
• Purpose of cash flow forecasting

  • Allows a business to plan for the future
  • Assists the business in making important decisions (e.g. employing more staff, opening a new branch, investing in a new business, rewarding owners)
  • Helps identify the risks of negative cash flow
• Calculating cash flow

  1. Find or estimate figures for cash inflows (all money coming into the business)

  2. Find or estimate figures for cash outflows (all money moving out of the business to pay for its costs)
• Calculating cash flow for a new business can be difficult as the business will have no previous figures to help estimate future cash inflows and outflows
• An established business can compare its actual cash flow with its cash flow forecast to monitor whether it is achieving its targets
• net cash flow = cash inflows – cash outflows
• The opening balance is the amount of money a business starts with at the beginning of the reporting period
• The closing balance is the amount of money the business has at the end of the reporting period