Cash Flow Forecasting and Working Captial Flashcards
Why is cash important to a business
- used to pay workers
- production of goods/services will stop
- the business may be forced into liquidation
- used to pay suppliers (if don’t then suppliers might not sell to you)
- ## used to pay dividends for public shareholders
What is cash flow
The motion of cash through a business over a period of time (inflows and outflows)
Inflows - cash going into the business over a period of time eg: a bank loan
Outflows - the sums of money paid out by a business over a period of time eg: salaries
Profit definitions and equation
Profit is the surplus after total costs have been subtracted from revenue
Revenue - total costs
Remember: cash flow is not the same as profit! Profitable business can still run out of cash
Cash flow forecasts definition
An estimate of the future cash inflows and outflows in a business showing the excepted cash balance at the end of each month
Cash flow forecasts (definitions of opening/closing balance and net cash flow)
Net cash flow - the difference between the inflows and outflows at the end of each month
Closing balance - the amount of cash held by the business at the end of each month (it becomes the opening balance the next month)
Opening balance - the amount of cash held by the business at the start of each month
Importance of cash flow forecasts
- shows how much cash is available to paying bills
- helps predict cash for starting a new business
- whether the business is holding to much cash which could be used for a profitable use
Equations used in cash flow forecast
Net cash flow + closing balance = opening balance
Inflows - out flows = net cash flows
Working capital definition and equation
The capital available to a business in short term to pay for day to day expenses
Working capital = current assets - current liabilities
Methods to overcome a cash flow product
Increasing bank loans,
Delaying payments to suppliers
Asking debtors to pay faster
Delay or cancel purchases of capital equipment
