Cash and profit
- Cash flow is the money flowing into and out of a business. Inflows include sales, loans and owners' capital. Outflows include wages, payments to suppliers, rent and loan repayments.
- Cash isn't the same as profit: a profitable business can run out of cash, for example if customers pay late, and may become insolvent.
Cash flow forecasts
- Net cash flow = total inflows − total outflows. Closing balance = opening balance + net cash flow. Each month's closing balance becomes the next month's opening balance.
- Example: an opening balance of £2,000, inflows of £5,000 and outflows of £6,500 give a net cash flow of −£1,500 and a closing balance of £500.
Solving cash flow problems
- Use an overdraft or short-term loan, negotiate longer trade credit with suppliers, ask customers to pay sooner, reduce stock, cut costs, sell unused assets, or reschedule payments.
- Forecasting helps a business pay its bills and wages, plan when it needs finance, and show lenders it is well managed.
Key terms
- Cash flow
- The money flowing into and out of a business.
- Cash inflow
- Money coming into a business, such as from sales.
- Cash outflow
- Money leaving a business, such as wages.
- Net cash flow
- Total cash inflows minus total cash outflows.
- Opening balance
- The cash a business has at the start of a period.
- Closing balance
- The cash a business has at the end of a period.
- Cash flow forecast
- A prediction of a business's future inflows and outflows.
- Insolvency
- Being unable to pay debts when they are due.