3.7 Cash flow Flashcards
Cash flow
The movement of an organization’s cash inflows (cash received from the sale of goods and/or services) and cash outflows (used to pay for the costs of running a business).
Cash flow forecasting
A management tool used to monitor an organization’s cash flows in order to avoid liquidity problems.
Working capital
current assets − current liabilities
Current assets
stock + debtors + cash
Current liabilities
creditors + overdrafts + short-term loans
Cash inflows
- cash used by customers to pay for sale of goods and services
- bank overdrafts and/or bank loans
- capital injections from the owners of the business
- payments made to the business from its debtors
- governments grants and/or subsidies
- cash injection from sponsors
Liquidity problems
Occurs when there is a lack of cash in the organization because its cash inflow is less than its cash outflow.
Cash outflows
- rent of premises
- purchasing raw materials
- staff wages, salaries and perks (benefits)
- utility bills
- insurance
Net cash flow (formula)
cash inflows - cash outflows
Net cash flow
Refers to an organization’s estimated difference between its monthly cash inflows and cash outflows.
Opening cash balance
For each month is the closing cash balance for the previous month.
Total cash inflows
All the cash inflows for a particular month.
Total cash outflows
The sum of all the cash outflows for a particular month.
Closing balance
Calculated by adding the net cash flow of a particular month to its opening balance.
Closing balance (formula)
opening balance + net cash outflow
