Cash Flow

Question 0

What is insovency

Answer 0

Insolvency

If a business runs out of cash and cannot pay its suppliers or workers it is insolvent. The owners must raise extra finance or cease trading. This is why planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft.

Question 1

What is cash flow

Answer 1

Cash flow is the movement of money in and out of the business.
cash flows into the business as receipts - eg from cash received from selling products or from loans
cash flows out of the business as payments - eg to pay wages, supplies and interest on loans
net cash flow is the difference between money in and money out

Question 2

How to improve cash flow

Answer 2

A business can improve its cash flow by:
reducing cash outflows - eg by delaying the payment of bills, securing better trade credit terms or factoring
increasing cash inflows - eg by chasing debtors, selling assets or securing an overdraft