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Why Cash Is Important
Cash = most liquid asset, immediately available for spending.
Without cash, a business cannot pay workers, suppliers, rent, or bills.
Lack of cash can stop production and lead to liquidation.
Cash flow = inflows and outflows over a period of time.
Cash Inflows Sources
Cash sales.
Debtors paying.
Bank loans.
Sale of assets.
New investment/share capital.
Cash Outflows Sources
Buying materials.
Paying wages/salaries.
Paying expenses (rent, electricity).
Buying non‑current assets.
Repaying loans.
Paying creditors.
The Cash Flow Cycle
Shows the time gap between paying for inputs and receiving cash from customers.
Longer cycle → greater need for working capital.
Cash Flow vs Profit
Profit = revenue − costs.
Cash flow = actual cash movement.
A business can be profitable but still run out of cash (insolvency).
Reasons: too much credit given, buying too many fixed assets, expanding too fast (overtrading).
Cash Flow Forecast
A month‑by‑month estimate of future inflows, outflows, and cash balances.
Used to:
Check if enough cash is available to pay bills.
Identify when loans/overdrafts are needed.
Avoid insolvency.
Ensure excess cash is not left idle.
Looks like this:
Key Terms
Net cash flow = inflows − outflows.
Opening balance = cash at start of month.
Closing balance = cash at end of month (becomes next month’s opening balance).
Uses of Cash Flow Forecasts
Starting a business (predicting early cash needs).
Running an existing business (planning for purchases, loans).
Keeping the bank informed (required for loans).
Managing cash efficiently (avoiding too much or too little cash).
How to Interpret a Cash Flow Forecast
Positive net cash flow → cash increases.
Negative net cash flow → cash decreases; may lead to overdraft.
A negative closing balance = overdrawn (bank account below zero).
How to Solve Short‑Term Cash Flow Problems
Methods & Limitations
Increase bank loans → injects cash, but interest + repayment required.
Delay payments to suppliers → reduces outflows, but suppliers may refuse or remove discounts.
Ask debtors to pay faster / insist on cash sales → increases inflows, but may lose customers.
Delay/cancel purchase of capital equipment → reduces outflows, but harms long‑term efficiency.
Long‑Term Solutions to Cash Flow Problems
Attract new investors (share issue) → may reduce ownership.
Cut costs and improve efficiency → may upset employees or reduce quality.
Develop new products → increases revenue but requires short‑term spending.
Working Capital
Working capital = current assets − current liabilities.
Needed for day‑to‑day operations (materials, wages, bills).
Longer cash flow cycle → more working capital required.
NOTES DONE BY FARIDA SABET
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