Cash Flow

Question 1

What is cash flow?

Answer 1

Cash flow is the movement of money in and out of the business.

Question 2

Whats the process of cash flow?

Answer 2

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 3

Whats the difference between profit and cash flow?

Answer 3

Profit and cash flow are two very different things. Cash flow is simply about money coming and going from the business. The challenge for managers is to make sure there is always enough cash to pay expenses when they are due, as running out of cash threatens the survival of the business.

Question 4

Whats insolvency?

Answer 4

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 5

Whats an overdraft?

Answer 5

An agreement with the bank to overspend on an account.

Question 6

How can a business improve its cash flow?

Answer 6

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