To pay suppliers, overheads, and employees To prevent business failure - if business runs out of cash, it
a lot of purchases made from suppliers will have been may become insolvent - inability to meet debts -> business
made using trade payables. may close.
overheads - money spent regularly on rent, insurance, A business will have better control over its cash flow if it:
electricity, and other things that are needed to a keep a
business operating. - keeps up-to-date records of
Importance of cash:
financial transactions
Cash inflows and outflows: - cash inflows - flow of - always plans ahead by producing
money into a business - such as revenue, loans, accurate cash flow forecasts -
capital, interest and sales of aseets. *prediction of all expected receipts and
expenses of a business over a future
cash outflows - flow of money out of a business - time period, which shows the expected
such as wages, tax, rent, machinery, utilities, and cash balance at the end of each month*
materials. - operates an efficient credit
net cash flow - difference between cash inflows control system, which prevents slow or
and cash outflows - net cash flow may be positive late payment.
(meaning that more cash flows in than flows out)
or negative (meaning that a business will have to
borrow money). Why are cash flow forecasts important:
- identify cash shortages - the forecast shows how
Difference between cash and profit: profit is the much cash is left at the end of each month, and so
revenue less all the expenses of a company in a prepares the business for upcoming stes they may
certain period, while cash flow is cash flows that Cash Flow Forecasting take, such as bank overdraft..
flows in and out to/from a business throughout a - supporting applications of funding - this will
certain period of time. help to show the future outlook for the business.
- help when planning the business - help to clarify
aims and improve performance.
Cash flow forecasts: - cash flow forecast is a - monitoring cash flow - a business should do a
financial document which shows the expected cash comparison between their expected and ongoing
inflows and cash outflows over a future period, as performance, which will help in figuring out problems
well as closing cash balance - amount of cash the and their reasons.
business expects to have at the end of each month
(takes into account the cash inflows and cash
outflows).
