Cash flow refers to the movement of money in and out of a business over time. While a business may be profitable, it can still experience cash flow problems if it does not have enough cash on hand to cover expenses. This can occur if customers take too long to pay, assets are purchased all at once, or inventory is expanded too quickly. The document then provides an example cash flow statement that shows a business becoming overdrawn in May due to higher cash outflows than inflows that month. To remedy short-term cash flow issues, businesses can delay some payments, negotiate longer credit terms, or take out loans until cash flow improves. Maintaining adequate working capital is important for businesses to stay liquid and pay short-term debts

2. Cash is a liquid asset, meaning that can
be spent on goods and services any time.
Many business experience cash flow
problems, meaning that they do not have
enough cash to do what they want to do.
Cash flow means "the flow of money in
and out of a business".

3. Sale of goods for cash.
Payment from debtors.
Borrowing from a source (but will inevitably lead to cash
outflow in the future).
Sale of unwanted assets.
Investment from investors: shareholders and owners

4. Purchasing goods for cash.
Payment of wages, salaries and others in cash.
Purchasing fixed assets.
Repaying loans.
Repaying creditors.

7. Cash flow = Cash inflow - Cash outflow
Profit = Sales to Customers – Cost of goods sold
HOW IS IT POSSIBLE THAT PROFITABLE BUSINESS MAY RUN OUT OF CASH?
Allowing customers too long to pay back,
Purchasing too many assets at once.
Producing or purchasing too much stock/inventory when expanding too quickly.

8. Sales to Customers $ 50,000 (40% cash, 60% credit of
two months)
Cost of Goods Sold $ 18,000 (Cash)

9. PARTICULARS APRIL ($) MAY
($)
JUNE ($)
Opening Balance (A)
Cash Inflows (B)
Cash Outflows (C)
NET CASH FLOW
(D = B - C)
Closing Balance (A+D)
1,000
3,500
3,000
500
1,500
1,500
4,500
6,500
(2,000)
(500)
(500)
5,000
4,000
1,000
500
As we can see, the closing balance in May is negative, which means that it has
become overdrawn.

10. if the business cannot delay some payments by two months it has two options
Use another source of finance like loan
As the shortage is forecasted to be for a short term,
the business may arrange an overdraft with bank
to cover the shortage.
In case of negative balance of cash business can delay some payment to have
positive cash flow
If the business knew in advance are there is going to be a period of cash shortage it
can take action to try to prevent this from happening.

11. Ask customer to pay more quickly for
goods by offering discount to
customers who have been sold goods
on credit
Negotiate longer credit terms with
suppliers
Delay the purchase of non current
asset until the cash flow improves
increase bank loan or overdraft facility

12. All the business must have enough finance to pay for their day to day expenses such as
paying workers wages and buying raw materials.
Working capital measures the liquidity of business. Liquidity is the ability of a
business to pay its short term debts
Business which does not have enough working capital will be illiquid as it cannot pay
its short term liabilities
Business may have to borrow the finance required business pay interest on the
amount borrowed and this increases their business fixed cost