Cash Management and Flow Concepts

Study Notes

Importance of Cash

Cash is crucial for a business to operate smoothly, as it's essential for paying workers, suppliers, landlords, and government.
Without sufficient cash, a business might need to liquidate assets (sell everything) to cover its debts.
Adequate cash is necessary to meet all short-term payments.

Cash Flow

Cash flow tracks a firm's cash inflows and outflows over a period.
Cash inflows are the money a business receives.
Cash outflows are the money a business pays out.
Cash flow is separate from profit—profit is the total of a firm's income less costs—cash flow is about cash receipts and payments only.

Cash Flow Forecasts

A cash flow forecast predicts future cash inflows and outflows, usually monthly.
It estimates the expected balance at the end of each month.
Forecasts help managers understand cash flow trends.
The opening cash balance starts the month and is used to calculate the closing cash balance -The net cash flow is calculated by subtracting total cash outflows from total cash inflows
The closing cash balance of one month becomes the opening balance of the next.

Uses of Cash Flow Forecasts

To determine the expected cash position at different times.
To anticipate potential cash flow problems.
To identify any possible shortages or surpluses in cash.

Overcoming Cash Flow Problems

To improve cash flow, businesses must increase inflows (e.g. sales), cut costs or attract investors in the long-term.
Short-term measures can include seeking short-term loans, selling assets, or renegotiating payment terms with creditors.

Working Capital

Working capital is the money a company needs for daily operations (short-term expenses).
It encompasses liquid assets (easily converted to cash) used to pay off debts.
Examples of working capital include cash, accounts receivables and inventory.

Description

Explore the vital roles of cash in business operations, including cash flow tracking and forecasting. Understand how cash inflows and outflows impact a company's financial health and decision-making processes. This quiz will help you grasp essential cash management techniques critical for success.