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Cash Flow

Cash Flow. You need to understand:. Why cash is important to a business. The difference between profit and loss. Why and how businesses draw up cash flow forecasts. CASH FLOW. More profitable businesses go bankrupt because of poor cash flow. Cash flow is more than just profits.

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Cash Flow

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  1. Cash Flow You need to understand: • Why cash is important to a business. • The difference between profit and loss. • Why and how businesses draw up cash flow • forecasts.

  2. CASH FLOW More profitable businesses go bankrupt because of poor cash flow. Cash flow is more than just profits • Cash flow is the flow of all money into and out of the business. • It is important because if their isn’t enough money flowing in you won’t have enough money to pay your bills.

  3. Cash Flow Cash Flows can be compared to water flowing into and out of a bath. The important thing is to maintain a reasonable amount of water in the bath and never allow it to drain away. Cash In Start up capital Cash from sales of goods/services Bank Loans Grants etc. Cash Out Raw materials or stock Fixed costs Tax payments Equipment Wages and salaries etc.

  4. Cash Flow Cash Flow Forecasts A cash flow forecast is a way of trying to predict what money will come in and go out over a fixed period of time (normally a month). • A negative closing balance (a deficit) at the end of a month indicates that • there is not enough cash to pay the immediate bills. • A regular large surplus in the closing balance suggests a business could afford • to pay off some debts, or buy new stocks or equipment.

  5. Plus Minus Equals Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Cash In 6.8 7.2 6.7 6.3 8.5 6.8 5.6 7.6 6.8 6.7 4.6 9.8 Cash Out 5.0 6.5 5.9 6.4 4.8 6.4 6.7 6.5 6.1 5.4 6.8 7.6 Net Cash Flow 1.8 0.7 0.8 (0.1) 3.7 0.4 (1.1) 1.1 0.7 1.3 (2.2) 2.2 Opening Bal’ 0 1.8 2.5 3.3 3.2 6.9 7.3 6.2 7.3 8.0 9.3 7.1 Closing Bal’ 1.8 2.5 3.3 3.2 6.9 7.3 6.2 7.3 8.0 9.3 7.1 9.3 Cash Flow Forecasts Cash Flow can be compared to water flowing into and out of a bath. It is important to maintain a reasonable level of water in the bath and never allow it to drain away. A “Cash Flow Forecast” is a way of trying to predict the revenue that will come into and go out of a business over a fixed period of time. This is an example of a Cash Flow Forecast: £(000’s)

  6. Poor cash flow means big problems • Poor cash flow means there is not enough money to meet day-to-day expenses – there is a lack of working capital. • Staff may not get paid on time- cause resentment and poor motivation. • Will not be able to take advantage of discount for prompt payments to suppliers • Creditors may not get paid on time therefore impose stricter terms • Some might take legal action to recover the debt.

  7. Cash flow forecast help firms anticipate problems. • Good way of predicting when a firm might go into liquidity • When an overdraft may be needed. • Needs to monitor impact of unexpected cash flows

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