Cash flow refers to the total amount of money transferred in and out of a business over a period of time. Cash inflows come from sources like sales revenue, loans, and investments. Cash outflows go toward expenses like inventory purchases, payroll, loan repayments, and supplier payments. Preparing regular cash flow forecasts is important for businesses to plan for liquidity needs, loan requirements, and periods of negative cash flow. When cash flow is projected to be negative, businesses may take actions like delaying payments, increasing loans, or selling assets to maintain sufficient cash reserves.

2.  Cash is a liquid asset immediately available for the business to use and spend.
 If a firm doesn’t have any cash to pay its workers, suppliers, landlord and
government, the business face major problems, such as:
1) Unable to pay employees and suppliers
2) Production of goods stop
3) could go into liquidation– selling everything it owns to pay its debts.
The business needs to have an adequate amount of cash to be able to pay for all its
short-term payments.
Cash flow – The total amount of money being transferred into and out of a business
over a period of time.

3.  Sums of money received by a business during a period of time.
E.g.:
 sales revenue from sale of products
 payment from debtors– debtors are customers who have already purchased goods from
the business but didn’t pay for them at that time
 money borrowed from external sources, like loans
 the money from the sale of business assets
 investors putting more money into the business
Cash inflow are used to measure overall financial health of a business and a company
with a large and stable cash inflow can be considered to be in a good financial position.

4.  sums of money paid out by the business over a period of time.
Eg:
 purchasing goods and materials for cash
 paying wages, salaries and other expenses in cash
 purchasing assets such as buildings and machinery
 Paying dividends
 repaying loans (cash is going out of the business)
 by paying creditors of the business- creditors are suppliers who supplied
items to the business but were not paid at the time of supply.
 Servicing or maintenance of company equipments’

5. Output & sales
would fall of we
don’t have
enough funds
Might lose the
customer to a
competitor who
could offer
credit

6.  Profit is the surplus amount after total costs have been deducted from sales. It
includes all income and payments incurred in the year, whether already received
or paid or to not yet received or paid respectfully.
 In a cash flow, only those elements paid by cash are considered.
 It is possible for the profitable business to run out of cash. By
1. Allowing customers too long a credit period to encourage sales
2. Purchasing too many fixed assets at once
3. Expanding too quickly and keeping a high inventory level.

7. A cash flow forecast is an estimate of future cash inflows and outflows of a business,
usually on a month-by-month basis. This then shows the expected cash balance at
the end of each month. It can help tell the manager:
 how much cash is available for paying bills, purchasing fixed assets or repaying
loans
 how much cash the bank will need to lend to the business to avoid insolvency
(running out of liquid cash)
 whether the business has too much cash that can be put to a profitable use in the
business

9.  The cash inflows are listed first and then the cash outflows. The total inflows and
outflows have to be calculated after each section.
 The opening cash/bank balance is the amount of cash held by the business at the
start of the month
 Net Cash Flow = Total Cash Inflow – Total Cash Outflow
 The net cash flow is added to opening cash balance to find the closing cash/bank
balance– the amount of cash held by the business at the end of the month.
Remember, the closing cash/bank balance for one month is the opening cash/bank
balance for the next month!
 The figures in bracket denote a negative balance, i.e., a net cash outflow (outflows
> inflows)

10.  when setting up the business the manager needs to know how much cash is
required to set up the business. The cash flow forecast helps calculate the cash
outflows such as rent, purchase of assets, advertising etc.
 A statement of cash flow forecast is required by bank managers when the business
applies for a loan. The bank manager will need to know how much to lend to the
business for its operations, when the loan is needed, for how long it is needed and
when it can be repaid.
 Managing cash flow– if the cash flow forecast gives a negative cash flow for a
month(s), then the business will need to plan ahead and apply for an overdraft so
that the negative balance is avoided (as cash come in and the inflow exceeds the
outflow). If there is too much cash, the business may decide to repay loans (so that
interest payment in the future will be low) or pay off creditors/suppliers (to
maintain healthy relationship with suppliers).

11. When a negative cash flow is forecast (lack of cash) the following methods can be used to correct it:
 Increase bank loans: bank loans will inject more cash into the business, but the firm will have to
pay regular interest payments on the loans and it will eventually have to be repaid, causing
future cash outflows
 Delay payment to suppliers: asking for more time to pay suppliers will help decrease cash
outflows in the short-run. However, suppliers could refuse to supply on credit and may reduce
discounts for late payment
 Ask debtors to pay more quickly: if debtors are asked to pay all the debts they have to the firm
quicker, the firm’s cash inflows would increase in the short-run. These debtors will include credit
customers, who can be asked to make cash sales as opposed to credit sales for purchases (cash
will have to be paid on the spot, credit will mean they can pay in the future, thus becoming
debtors). However, customers may move to other businesses that still offers them time to pay
 Delay or cancel purchases of capital equipment: this will greatly help reduce cash outflows in the
short-run, but at the cost of the efficiency the firm loses out on not buying new technology and
still using old equipment.
 In the long-term, to improve cash flow, the business will need to attract more investors, cut
costs by increasing efficiency, develop more products to attract customers and increase inflows.

12. Working capital the capital required by the business to pay its short-term day-to-
day expenses. Working capital is all of the liquid assets of the business– the assets
that can be quickly converted to cash to pay off the short-term business’ debts.
Working capital can be in the form of:
 cash needed to pay expenses
 cash due from debtors – debtors/credit customers can be asked to quickly pay off
what they owe to the business in order for the business to raise cash
 cash in the form of inventory – Inventory of finished goods can be quickly sold off
to build cash inflows. Too much inventory results in high costs, too low inventory
may cause production to stop.