Cash is a crucial liquid asset for businesses, necessary for meeting obligations like paying employees and suppliers; a lack of cash can lead to liquidation. Cash flow comprises cash inflows and outflows over time, distinguishing it from profit, and cash flow forecasts help businesses manage and plan for cash availability. To address cash flow problems, companies can increase loans, delay payments, accelerate receivables, or manage inventory effectively.

1. Why is cash important?
 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 could go
into liquidation– selling everything it owns to pay
its debts.
Problems for the business if it has too little cash
 Can’t pay employees and suppliers
 Production of goods stops
 Liquidation (business stops and sells assets to pay
debts)

2. Cash Flow
 The cash flow of a businesses is its cash
inflows and cash outflows over a period of time.
 Cash inflows are the sums of money received by
the business over a period of time. E.g.:
 sales revenue from sale of products
 receipt from trade receivables– trade
receivables 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

3. Cash outflows are the 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 non current assets
 repaying loans (cash is going out of the business)
 by paying trade payables of the business- trade
payables are suppliers who supplied items to the
business but were not paid at the time of supply.

5. Cash flow is not the same as profit! Profit is the
surplus amount after total costs have been
deducted from sales revenue. 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 or recived by cash are considered.
Cash flow forecast – Estimate of future cash inflows
& outflows of the business and shows expected
balance at the end of each month/period of time.

6. Why do businesses need cash flow forecasts?
 To startup the business
 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

7.  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.

8. Uses of cash flow forecasts:
 when setting 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. If there is too much
cash, the business may decide to repay loans or pay off
creditors/suppliers.

9. How can cash flow problems be overcome?
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.

10.  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.

11. Working Capital(Net Current Assets)
 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 business’ debts.
Working capital= Current assets – Current Liabilities
Current assets: Inventory, Trade Receivables, Cash
and Cash Equivalents, Prepaid Expenses, Accrued
Income
Current Liabilities: Trade Payables, Bank overdraft,
Prepaid Incomes, Accrued Expenses

12. Working capital can be in the form of:
 cash needed to pay day to day expenses
 cash due from trade receivables– 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

13. Jan $ Feb $ Mar $ Apr $ May $ June $
Cash Inflows
Receipts 15 000 17 000 15 500 16 500 20 000 18 000
Total Inflows 15 000 17 000 15 500 16 500 20 000 18 000
Cash outflows
Payments 13 000 20 000 22 000 17 000 18 000 16 000
Total Outflows 13 000 20 000 22 000 17 000 18 000 16 000
Net cash flow 2 000 (3 000) (6 500) (500)
Opening
Balance(Bank)
5 000 7 000 4 000 (2 500)
Closing
Balance (Bank)
7 000 4 000 (2 500) (3 000)

14. Jan $ Feb $ Mar $ Apr $ May $ June $
Cash Inflows
Receipts 28 700 24 600 30 250 24 500 32 000 27 350
Total Inflows 28 700 24 600 30 250 24 500 32 000 27 350
Cash outflows
Payments 30 200 25 500 24 300 22 750 24 800 28 500
Total Outflows 28 700 24 600 30 250 24 500 32 000 27 350
Net cash flow
Opening
Balance(Bank)
(1 250)
Closing
Balance (Bank)