3.7 Cash flow Flashcards
What does “cash flow” refer to?
Cash flow refers to the movement of an organization’s cash inflows (cash received from the sale of goods and services) and cash outflows (used to pay for the costs of running the business).
What does “cash flow” useful to businesses?
Cash flow is often used to measure the financial health of a business - and is an indicator of the financial health of the economy as a whole. This is because the comparison of cash inflows and cash outflows enables managers to see whether the business is able to pay its costs in order to maintain its operations.
What is the difference between cash and profit?
In your P+L account your profit could be higher than the cash balance, this could be due to for example payments coming in instalments/ trade credit. So the profit HAS been made, just not cash yet
Why is “cash flow forecasting” useful for businesses?
Knowing in advance when the business is likely to face a period of cash shortages (or a liquidity problem) can help it to plan accordingly so that it can continue to operate.
When does a “liquidity problem” occur?
A liquidity problem occurs when there is a lack of cash in the organization because its cash inflow is less than its cash outflow, i.e. it experiences negative net cash flow.
