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Cash Flow

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Cash Flow Cash Flows Cash is the most liquid of all the assets of a business - it represents the bank balance and the cash that the business has available on the premises (otherwise known as 'petty cash'). Cash flow refers to the difference between the cash flowing into the business (e.g. through sales revenue) and the cash flowing out of the business (e.g. bills and wages). Cashflow problems Having a positive cash flow is vital for the survival of a business, since without the ability to pay workers and suppliers then the business will soon have to cease trading. This potential problem is compounded by the fact that businesses often have to pay many expenses several weeks or even months before any cash actually flows into the business. ...read more.


Selling off fixed assets. 3) A 'sale and lease back' arrangement. 4) Chasing debtors for the monies owed to the business. 5) Selling off stocks. Whatever action is decided upon, the business must ensure that it is implemented quickly and that a careful eye is kept on the liquidity (cash flow) position in the future. Cashflow statement A cash flow statement is a Financial Accounting document, which shows the cash inflows and the cash outflows for a business over the past 12 months. It indicates those months in which the business suffered a cash flow crisis (where cash outflows were greater than cash inflows) and it will also highlight those months in which the business was cash-rich (i.e. more cash inflows than cash outflows). It allows a business to prepare a cash flow forecast for the forthcoming year, by basing the estimated cash inflows and outflows on the results from the previous year. ...read more.


In February, the forecasted cash inflows are only �100 more than the forecasted outflows, leaving a bank balance of �700. However, in the months of March and April, the business is forecast to experience negative net monthly cash flows (i.e. its cash outflows are forecast to be greater than its cash inflows). This gradually reduces the bank balance to just �300 by the end of April. It is important for a business to produce a cash flow forecast, so that it can prepare for those months in which it is forecast to experience a cash flow crisis (i.e. the business needs to arrange extra borrowing or overdraft facilities to provide extra cash). Alternatively, in the months where the business is forecast to be cash-rich, it can use this money profitably elsewhere within the business (e.g. new product development). ...read more.

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