cash and cash flow + short term finances Flashcards
what is the importance of cash to a business
to pay suppliers, overheads, and employees
to prevent business failure (insolvency)
the difference between cash and profit
difference between cash and profit
cash refers to immediate funds available
profit measures overall financial performance but may not reflect liquidity
cash inflows
all of the money coming into the business (eg sales or loans)
cash outflows
all if the money that will leave the business in order to pay its fixed and variable costs (eg wages or bills)
net cash flow
difference between cash inflows and outflows
net cash flow= cash inflows- cash outflows
opening balance
amount of money on the businesses bank account at the start of any period
closing balance
the amount of money in the bank at the end of a period
closing balance= opening balance + net cash flow
short term sources of finance for start up or small established business
overdraft
trade credit
what is overdraft
a facility offered by a bank that allows an account holder to borrow money at short notice
what is trade credit
a credit arrangement that is offered only to businesses by suppliers
(delayed payment terms for suppliers)
how is trade credit useful for a business
supports a businesses cash flow by enabling it to use products or materials before paying for them
advantage of trade credit
improved cash flow
no interest if on time
flexibility for business
strengthens ties with suppliers, leading to better terms over time
disadvantage of trade credit
potential late fees- harm relationships
limited availability for start ups- no credit history
over dependence risks- strain cash flow if sales drop
advantage of overdraft
flexibility- manage short term gaps between cash inflows and outflows
no fixed repayments- more adaptable for cash flow cause no reg payments
interest only charged on amount borrowed
disadvantage of overdraft
high interest rates- increasing costs
repayment on demand
not suitable for long term -financial strain
