Cash Flow

Cash Flow

  • Definition: Inflows and outflows of cash in business.

  • Importance: Assesses financial health through cash flow forecasts.

Sales Revenue

  • Definition: Total income from goods/services sold.

  • Calculation: Sales Revenue = Price × Quantity

Profit

  • Definition: Net income after costs deducted from revenue.

  • Calculation: Profit = Sales Revenue – Total Costs

Differences Between Profit and Cash Flow

  • Profit may occur without cash inflow immediately.

  • Businesses can profit but face negative cash flow.

Working Capital

  • Definition: Liquid assets for operations.

  • Formula: Working Capital = Current Assets - Current Liabilities

  • Components:

    • Current Assets: Cash, inventory, receivables.

    • Current Liabilities: Debts due within one year (e.g., accounts payable).

Liquidity Position

  • Definition: Ability to quickly convert assets to cash.

  • Ratios:

    • Current Ratio: Current Assets / Current Liabilities

    • Acid Test Ratio: (Current Assets - Stock) / Current Liabilities

Cash Flow Forecasts

  • Purpose: Anticipates cash movements for liquidity management.

  • Components:

    • Cash Inflows: Payments from customers, loans.

    • Cash Outflows: Payments for expenses (salaries, utilities).

    • Net Cash Flow (NCF): Cash Inflows - Cash Outflows

    • Closing Balance Formula: Closing Balance = Opening Balance + Net Cash Flow

Investment, Profit, and Cash Flow

  • Investment Definition: Acquisition of fixed assets for profit.

  • Impact on Cash Flow: Initial costs may hurt cash flow but improve long-term profit.

Strategies for Cash Flow Problems

  • Reduce Cash Outflows: Negotiate credit terms, reduce inventory.

  • Increase Cash Inflows: Adjust pricing, shorten customer credit periods.

  • Seek Additional Finance: Use loans wisely, sell shares.