Cash and Cash Flow

• Importance


  main cash payments a business makes:

  • payments to suppliers
  • payments to employees
  • overheads e.g rent, electricity and telephone bills
• Importance


  credit terms - amount of money that a financial institution/supplier will a business to use, which it must pay back in the future at an agreed time
• Preventing Business Failure


  cash flow problems are caused when:

  • starting up - large amounts need to be invested into equipment, initial stock, rent, insurance, hiring, training and staff to get the business started
  • rapid growth - business needs to grow quickly but cannot keep up with cash being paid out, e.g needing to find larger premises
• Preventing Business Failure


  becoming insolvent - when a business is unable to pay its own bills due to customers not paying what they owe
• Preventing Business Failure


  positive cash flow - reduces risk of failure and insolvency
• Preventing Business Failure


  positive cash flow methods:

  • negotiate an overdraft facility
  • keep costs under control
  • keep cash entering the business by arranging sensible credit arrangements with suppliers/customers, and having fewer who pay for products and services on credit
• Cash vs Profit


  revenue - total costs = profit
• Cash vs Profit


  profit - calculated annually

  • calculating monthly shows a business that it is solvent (able to meet day-to-day expenses and repay debts) and indicates whether it will be able to achieve its profit targets
• Cash Flow Forecasts


  cash flow forecasting - predicting the future flow of cash in and out of a business' bank accounts

  • 12 month period
• Cash Flow Forecasts


  Forecasting cash inflows + outflows is important for:

  • new businesses
  • fast-growing businesses
  • businesses with unpredictable sales patterns - seasonal (ice cream vans)
• Cash Flow Forecasts


  Forecasts assist the business to plan for future decisions such as:

  • employing more staff
  • opening a new branch
  • investing in a new business
  • rewarding owners for their success
• Cash Flow Forecasts


  assist in helping a business identify the risks of negative cash flow
• Cash Flow Forecasts


  Calculating cash flow involves:

  • calculating cash inflows - all money coming into the business (sales, rent received, loans)
  • calculating cash outflows - all money moving out of the business to pay for its costs (suppliers, employees, overheads)
• Net Cash Flow


  net cash flow is the difference between all cash inflows and all cash outflows

  • net cash flow = cash inflows - cash outflows
• Cash Flow Forecasts


  opening balance - the amount of money a business starts with at the beginning of the reporting period

  • opening balance = closing balance of previous period
• Closing Balance


  closing balance - the amount of money the business has at the end of the reporting period

  • closing balance = net cash flow + opening balance