1.6.4 business survival and cash flow

What is the difference between profit and cash flow?

Profit considers income and expenses at one point in time; cash flow tracks the actual movement of money into and out of the business

Why is cash flow important to businesses?

Firms need liquid cash to pay wages, bills, and suppliers; even profitable firms can fail if cash is tied up in assets

Can profit and cash flow be correlated?

No, a firm can have high profits but negative cash flow, or low profits/losses but positive cash flow

How do firms manage short-term losses?

By delaying payments to creditors; long-term survival requires covering variable and immediate costs

What is a cash flow forecast?

A prediction of net cash flow over a future period, estimating money entering and leaving the business

What are the components of a cash flow forecast?

Cash available at start of period, cash inflows, cash outflows, net cash flow, cash available at end of period

Example of net cash flow calculation:

Net cash flow = Cash inflows – Cash outflows

How can a cash flow forecast identify credit requirements?

It highlights periods of insufficient cash; firms can arrange overdrafts or other credit

Why does cash flow forecasting minimise risk?

Warns firms of potential shortfalls before they occur, ensuring timely payments to suppliers and employees

Why might stakeholders request a cash flow forecast?

Banks, shareholders, or investors may want assurance that the firm can cover expenses and manage loans