Cash flow forecasting and working capital Flashcards
Cash flow
the cash flow of a business is the cash inflows and outflows over a period of time.
Problems with low cash flows
- Unable to pay workers, suppliers, landlords or governments
- Production of goods and services would stop
Cash inflows
are the sums of money received by a business during a period of time
Cash outflows
cash outflows are the sums of money paid out by a business during a period of time.
Cash inflows:
- Sale of products for cash
- Payments made by debtors
- Borrowing money from external source
- Sale of assets of the business such as unwanted property
Cash outflows
- Purchasing goods or materials for cash
- Paying wages, salaries and other expenses in cash
- Purchasing non current assets
- Paying loans
Cash flow cycle
shows the stages between paying out cash for labour, materials, and so on, and receiving cash from the sale of goods
Cash flow forecast
is an estimate of future cash inflows and outflows of a business, usually on a month-by-month basis. This then shows the expected cash balance at the end of each month.
Uses of cash flow forecast
- Start up a business
- Run an existing business
- keeping the bank manager informed
- managing cash flows
Insolvency
state of financial distress in which a person or business is unable to pay their debts.
Net cash flow
is the difference, each month, between inflows and outflows
Closing cash
is the amount of cash held by each business at the end of the month. this becomes next month’s opening balance
Opening cash
the amount of cash held by the business in the opening of the month
How to solve cash flow diffulties
- Attract new investors, for ex: by selling more company shares
- Cutting costs and increasing efficiency
- Develop new products that will attract more customers which is time consuming and high costs
Working capital
is the capital available to a business in the short term to pay for day-to-day expenses
