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Business Cash Flow

This document defines key terms related to cash flow and cash flow statements. It explains that cash flow is the movement of money in and out of a business, with cash inflows including revenue, loans, and commissions, and cash outflows including expenses like wages, supplies, and loan interest. A net cash flow is calculated as the difference between inflows and outflows. The document also notes that a cash flow statement prepared by the finance department will show monthly net cash flows and whether the business has sufficient cash on hand or credit to cover periods when outflows exceed inflows.

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12 views

Business Cash Flow

This document defines key terms related to cash flow and cash flow statements. It explains that cash flow is the movement of money in and out of a business, with cash inflows including revenue, loans, and commissions, and cash outflows including expenses like wages, supplies, and loan interest. A net cash flow is calculated as the difference between inflows and outflows. The document also notes that a cash flow statement prepared by the finance department will show monthly net cash flows and whether the business has sufficient cash on hand or credit to cover periods when outflows exceed inflows.

Uploaded by

nkp2xdstw7
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Variable cost - costs that change with level of output

Fixed cost - costs that stay same with level of output


Revenue - income a business earns over a period of time
Formula to work out Total Operating costs = fixed costs + variable costs

Cashflow -
Cashflow is the movement of money into and out of a business.
Cash inflows will include all the receipts of money.
Cash receipts from selling products and services
Loan receipts
Commission received
Rent received
Cash Outflows will include all payments made by the business
Wages
Insurance
Payments to suppliers
Loan Interest

Net Cash Flow -


Net Cash flow is the difference between the cash inflow and the
cash outflow
- Net cash flow will vary by month. When looking at a cash flow forecast in the
exam, always remember to look for months in which there is a net cash
outflow (i.e. a reduction in the cash balance of the business). If there is a
cash outflow, the questions you should ask are:
- Does the business have enough cash left after the outflow (look at the
closing balance)?
- If not, does the business have access to a bank overdraft?
- The Finance department will prepare a cashflow statement to show this

Cash inflows - Cash that enters the business, for example sales revenue, loans, interest etc.
Total cash inflow - The sum of all the cash inflows during a period of time (usually one
month).
Cash outflows - Cash that leaves the business, for example raw materials, utility payments,
salaries etc.
Total cash outflows - The sum of all the cash outflows during a period of time (usually one
month).
Opening balance - The cash that business has at the start of the period (usually one manth).
Closing balance - The cash that the business has at the end of the period (usually one
month). This becomes the opening balance for the next period.
Cash flow - The difference between the total cash inflows and the total cash outflows during
a period of time (usually one month,
Cash flow forecast - A prediction of cash inflows and cash outflows for a business, including
all of the above elements.
Low profits or (worse) losses -
There is a direct link between low profits or losses and cash flow problems. Remember -
most loss-making businesses eventually
run out of cash
Over-investment in capacity -
This happens when a business spends too much on production capacity. Factory equipment
which is not being used does not
generate revenues – so is often a waste of cash
Too much stock -
Holding too much stock ties up cash and there is an increased risk that stocks become
obsolete (i.e. it can't be sold)
Allowing customers too much credit -
Customers who buy on credit are called "trade debtors" Offering credit to customers is a
good way to build revenue, but late
payment is a common problem and slow-paying customers put a strain on cash flow
Overtrading (growing too fast) -
This occurs where a business expands too quickly, putting pressure on short-term finance.
For example, a retail chain might try to
open too many stores too quickly before each starts to generate profits
Seasonal demand -
Predictable changes in seasonal demand create cash flow problems – but because they are
expected, a business should be able to
handle them

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