3.7. Cash flow

Cash flow

Movement of available cash into and out of a business over a period time

Profit

Surplus of total revenue over total costs regarding the quantity of products

Working capital

Net amount of finance that is available to business to use for day-to-day operation in the business.

It is measured by the difference between the current assets (e.g. cash) and current liabilities (e.g. debts)

Examples of working capital

Cash and cash equivalents, inventory, etc.

Working capital cycle

The period of time between spending cash on the production process and receiving cash payments from customers

Liquidity position

A degree of how easily an asset can be turned into cash

Liquid assets

cash and items that can be quickly converted to cash

Liquid crisis

When there is insufficient cash in the working capital cycle. Cash outflow > Cash inflow

Opening balance

The amount of cash at the beginning of a trading period

Closing balance

Opening balance + net cash flow

Methods of reducing cash outflows

Seeking preferential credit terms, seeking alternative suppliers, better stock control, reducing expenses, leasing rather than buying

Methods of increasing cash inflows

Providing tighter trade credit, accepting cash payments only, changing pricing policy, improving the firm's product portfolio

Seeking additional sources of finance

Overdrafts, selling fixed assets, debt factoring, government assistance, additional sources of finances.

Strategies for dealing with cash flow problems

- reducing cash outflows

- improving cash inflows

- sourcing additional finance

Investment and cash flow

In the short term, investment is likely to weaken a business's cash-flow position. It can be expected to cause a business to suffer a significant outflow of cash.

In the longer term, the investment may result in the business with stronger cash inflows.

Investment and profit

Most investment decisions by businesses are taken to increase profits

In the short term, it may decline while it could rise in long term depending on the success of the investment