Cash Flow Planning

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


  1. Cash need to pay for
  2. Materials, wages, rent etc.
  3. Goods produced
  4. Goods sold
  5. Cash payment received
  6. Repeat


  • 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


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