3.7 Cash Flow

What is cash flow

Movement of money in and out of a business.

What are cash inflows?

Money received by a business, e.g., sales revenue, loans, grants, interest.

What are cash outflows?

Money paid out by a business, e.g., expenses, salaries, rent, utilities.

Formula for net cash flow?

Cash inflows – Cash outflows

Define sales revenue

Value of goods/services sold. Formula: = Price × Quantity

Define profit

Value of sales revenue after all costs are subtracted. Formula: Sales revenue – Total costs

Can a business be profitable but still have negative cash flow?

Yes, because profit is based on sales revenue minus costs, whereas cash flow depends on the actual timing of money coming in and going out

What is trade credit?

Customers buy goods/services now but pay later, delaying cash inflow.

Define working capital.

Cash or liquid assets available for daily operations. Formula: Current assets – Current liabilities

Examples of current assets?

Cash, stock (inventory), debtors (customers who owe money).

Examples of current liabilities?

Bank overdrafts, trade creditors, short-term loans.

What is the working capital cycle?

Time between paying for production costs and receiving cash from customers.

What does positive working capital indicate?

Business can pay short-term liabilities easily.

What does negative working capital indicate?

Business may need short-term finance to survive.

Define liquidity.

Ability to convert assets into cash quickly without losing value.

Examples of liquid assets?

Cash, debtors, stock.

Examples of illiquid assets?

Property, plant, equipment.

Define current ratio and its formula.

Measures ability to pay short-term debts. Formula: Current assets ÷ Current liabilities

Define acid test (quick) ratio and its formula.

Measures ability to pay short-term debts without selling stock. Formula: (Current assets – Stock) ÷ Current liabilities

What is a liquidity crisis?

When a business cannot pay short-term debts, potentially leading to insolvency or bankruptcy.

What is a cash flow forecast (CFF)?

Prediction of cash inflows and outflows over a period of time.

Difference between cash flow forecast (CFF) and cash flow statement (CFS)?

CFF = predicted cash movements; CFS = actual cash movements over a period.

Formula for closing balance in a CFF?

Opening balance + Net cash flow

Formula for opening balance?

Previous period’s closing balance

What is the purpose of cash flow forecasting?

To prevent liquidity problems and ensure the business can operate.

Define investment (capital expenditure).

Purchase of non-current assets to generate profit in the future.

Short-term vs long-term effect of investment on cash flow?

Short-term: reduces cash flow. Long-term: intended to increase profit and cash flow.

Difference between capital expenditure (CapEx) and revenue expenditure (RevEx)?

CapEx = long-term assets; RevEx = daily operational spending.

Why must managers balance capital and revenue expenditure?

To avoid cash flow problems while funding business growth or profit objectives.

Name some causes of cash flow problems.

Poor planning, poor credit control, overtrading, seasonal demand, unexpected events.

Strategies to reduce cash outflows?

Negotiate longer trade credit, use trade credit instead of cash, lease equipment, reduce stock levels.

Strategies to increase cash inflows?

Raise/lower prices strategically, reduce credit period for debtors, offer early payment discounts, improve marketing, use debt factoring.

Strategies to seek additional finance?

Bank overdrafts/loans, sponsorships/donations, selling shares (LLCs), selling fixed assets.

What is a last-resort strategy for cash flow problems?

Selling fixed assets to raise finance.