IB Business Management Unit 3.7 - Cash flow

Assets

Items with a monetary value that belong to a business; can be fixed asset or current asset

Cash

A current asset and represents the actual money a business has; exists in the form of cash in hand or cash at hand

Cash flow

The transfer or movement of money into and out of an organization; cash inflows mainly come from sales revenue whereas cash outflows and for items expenditure

Cash flow forecast

A financial document that shows the predicted future cash inflows and cash outflows for a business during a trading period

Cash flow statement

The financial document that records the actual cash inflows an cash outflows of a business during a specific trading period

Closing balance

The value of cash left in a business at the end of each month, as shown in its cash flow forecast or statement, using the formula: closing balance = opening balance plus net cash flow

Current assets

Liquid resources owned by a business, i.e. cash, debtors and stocks

Current liabilities

The money that a business owes that needs to be repaid within the next twelve months, e.g. overdraft, creditors and taxes

Creditors

Businesses that have sold goods or services on trade credit, so will collect this money from its debtors at a future date

Debtors

Customers who have purchased goods or services on credit, so will collect this money from its debtors at a future date

Expenses

The expenditure in the working capital cycle, i.e. costs of production such as salaries, rent, advertising and distribution

Fixed assets

Illiquid resources owned by a business and are not intended for resale within the next twelve months but are used to generate revenue, e.g land, vehicles and trademarks

Insolvency

A situation where a firm's working capital is insufficient to meet its current liabilities; can lead to the collapse of the business as creditors will take legal action to recover their money

Liabilities

Debts owed by a business; current liabilities are short-term debts that need to be repaid within twelve months of the balance sheet date, e.g. overdrafts; long term liabilities are repayable over a longer period, e.g. bank loans

Liquidity

The ability of a business to convert assets into cash quickly without a fall in its value

Liquidity problem

Occurs where a business does not have enough cash to pay its current liabilities

Net cash fow

The cash that is leftover after cash outflows have been accounted for from the cash inflows, per time period

Opening balance

The value of cash in a business at the beginning of each month, as shown in its cash flow forecast or statement; equal to the closing balance in the previous month

Overheads

Costs not directly associated with the production process yet necessary for providing and maintaining business operations, e.g. rent

Overtrading

When a business attempts to expand too quickly without the sufficient recourses to do so, usually by accepting too many orders, thus harming its cash flow position

Profit

The positive difference between a firm's total sales revenue and tis total costs of production

Stock (inventory)

Physical goods that a business has in its possession for further production (raw materials) or for sale (finished goods)

Working capital (net current assets)

The amount of finance available to a business for its daily operations; calculated by current assets minus current liabilities

Working capital cycle

The time interval between cash outflows for costs of production and cash inflows from customers who receive their finished goods and services