Cash & Cash Flow
Business: Edexcel GCSE, topic 1.3.9
Cash Flow
Cash is the money that a business can spend immediately (it doesn't include money that a business owes or is owed). Cash flow is the amount of money that is coming in and out of a business and the timings of these cash transfers.
Cash inflows
- Cash inflows is the cash coming into the business.
Cash outflows
- Cash outflows is the cash going out of the business.
Net cash flows
- Net cash flows is equal to cash inflows minus cash outflows.
Opening balance
- Opening Balance is the amount of cash that the business starts to trade with.
- A negative net cash flow may not create a liquidity problem if the business has a high opening cash balance.
Closing balance
- Closing balance – the amount of cash that a business finishes trading with.
Cash Flow Forecasts
Cash flow forecasts are a business’ prediction of how much money will come in and out of the business in a given amount of time.
Cash flow forecasts
- Businesses will estimate all the possible sources of cash inflows (e.g. sales) and cash outflows (rent, salaries, costs of production).
- They may be able to forecast these inflows and outflows using past data on sales and costs, as well as using market research.
Forecasting liquidity problems
- It is important for businesses to forecast this accurately to avoid liquidity problems.
- A liquidity problem is when a business runs out of cash in the short-term. They won’t have enough cash to pay rent and employees’ wages.
- To solve a liquidity problem, a business has to reduce (or delay) cash outflows and increase (or get sooner) cash inflows.
Test yourself on Cash & Cash Flow
What is closing balance?
How can businesses solve liquidity problems?
What can businesses avoid by forecasting cash flow accurately?
How can businesses forecast cash inflows and outflows?