Cash flow -- 3.7

cash

lifeblood of a business because every organisation needs cash to keep functioning. It is needed to pay for daily costs such as wages and electricity changes and its a current asset

profit

positive difference between a firms total sales revenue and its total COP

• revenue - cost

high profit low cash meaning business is ….

Example:

• Business makes $100k profit

• But customers bought $150k worth of goods on credit

• The business has recorded the sales as revenue, but hasn't received the cash yet.

So:

Profit ↑ → but cash hasn't been collected → cash-poor

Other reasons:

• Large inventory purchases

• Repaying loans

• Buying machinery/equipment

• Customers taking a long time to pay

unprofitable with high cash

Cause	Cash	Profit
🏦 Take out a loan	↑	No change
👤 Owner invests money	↑	No change
🏢 Sell an asset	↑	May ↑ or ↓
💳 Collect money from debtors	↑	Usually no change*
📉 Make a loss	↓	↓

The cash could come from financing, selling assets, or collecting money that was owed from the past.

cash inflow

comes from sales revenue when customers pay for the products that they have purchased. They come from payments made by debtors ,loan from a bank , interest received from savings , sale of fixed assets….

• personal assets NOT COUNTED

• personal assets invested into the business COUNTED

cash outflow

cash that leaves a business. Eg : rent , wages , purchase of stocks , taxes etc

net cash flow

difference between cash inflow and cash outflows over a period of time

Reasons for cash flow forecast

1. assess financial health

2. identify periods of potential liquidity

3. aid business planning

4. good financial control — achieve organisational objectives

5. forecast can be compared with actual cash flows to improve future prediction planning

can help identify periods of potential liquidity explanation

It means cash flow helps a business see when it might not have enough cash to pay its short-term obligations.

Break it down

Liquidity = ability to pay short-term debts/bills when they are due.

opening balance

the amount of cash at the beginning of a trading period

closing balance

the amount of cash at the end of a trading period

• opening balance = opening balance + net cash flow

causes of cash flow problems

1. overtrading (expand to aggressively destroys working capital)

2. over borrowing (high interest rates)

3. overstocking (ineffective stock control system , waste of scarce resources opportunity cost)

4. poor credit control (when firm offer customers extended credit period , long delays , no cash to cover working capital)

5. unforeseen changes (machinery breakdown , seasonal fluctuations )

to deal with cash flow

1. reduce cash outflow

2. improve cash inflow

3. seeking alternative sources of finance

reducing cash outflow

1. seek preferential credit terms

2. seek alternative suppliers (offer cheaper prices)

3. better stock control (just in time system, mass market )

4. reduce expenses

5. leasing (cheaper in ST not good for LT)

preferential credit terms

1. receive credit from suppliers — pay them at a later date

2. cash from debtor/customers — reduce credit date / be strict

ways to improve cash inflow

1. tighter credit control

2. cash payments only (customers might want businesses that offer trade credit)

3. changing pricing policy (cutting prices can help convert stocks into cash , LT revenue might fall , works best for those at the end of product life cycle)

4. improved product portfolio (wider types of products — poor sales in one market can be offset by better sales in others but raise cost and risk yet doesnt guarantee higher net cash inflow)

5. seek alternative sources of finance (overdraft + selling fixed assets)