Chapter 8
- Cash Flow of a business is the cash inflows and outflows over a period of time
- It is not the same as profit and only considers the goods which have been paid/ paid for in cash
Cash Inflows
- The sums of money received by a business during a period of time
- Sale of goods for cash
- Payment by debtors
- Borrowing money
- Cash from investors
Cash Outflows
- The sums of money paid out by a business during a period of time
- Purchasing goods or materials for cash
- Payment of wages, salaries, other expenses
- Purchasing fixed assets
- Repaying loans
- Paying creditors
Cash Flow Cycle
- Shows the stages between paying out cash for labor, materials etc. and receiving cash from the sale of goods
- Cash need to pay for
- Materials, wages, rent etc.
- Goods produced
- Goods sold
- Cash payment received
- Repeat
Insolvency
- Insolvency is the inability to pay debts as they become due; total liabilities exceed total assets.
- Causes:
Too long a credit period given to customers
Sales are lower than expected
Costs are higher than expected
Purchasing too many fixed assets
Producing too high a level of stock [overtrading]
- Solutions:
Borrow money
Delay planned expenses
Increase forecasted cash income
Reduce expenses
Chase debtors
Insist customers pay cash
Cash Flow Forecasts
- An estimate of future cash inflows and outflows at the end of the month
- Net Cash Flow: Cash Inflows – Cash Outflows
- Uses:
Starting up a business
Keeping bank manager informed
Running an existing business
Managing cash flow