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    IGCSE Business Studies Chapter 08 Notes

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    emonimtiaz
    The document discusses cash flow planning and management. It defines cash flow as the flow of money in and out of a business from sources like sales, borrowing, and investments, and uses like purchases, wages, and loan repayments. It explains the cash flow cycle and how longer cycles can require more working capital. It also distinguishes cash flow from profit, noting that a profitable business can run out of cash through issues like slow customer payments, overinvestment, or overtrading. The document recommends managers forecast cash flow to plan for needs and avoid insolvency.

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    IGCSE Business Studies Chapter 08 Notes

    Uploaded by

    emonimtiaz
    557 views3 pages
    The document discusses cash flow planning and management. It defines cash flow as the flow of money in and out of a business from sources like sales, borrowing, and investments, and uses like purchases, wages, and loan repayments. It explains the cash flow cycle and how longer cycles can require more working capital. It also distinguishes cash flow from profit, noting that a profitable business can run out of cash through issues like slow customer payments, overinvestment, or overtrading. The document recommends managers forecast cash flow to plan for needs and avoid insolvency.

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    IGCSE Business Studies Chapter 08 Notes

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    The document discusses cash flow planning and management. It defines cash flow as the flow of money in and out of a business from sources like sales, borrowing, and investments, and uses like purchases, wages, and loan repayments. It explains the cash flow cycle and how longer cycles can require more working capital. It also distinguishes cash flow from profit, noting that a profitable business can run out of cash through issues like slow customer payments, overinvestment, or overtrading. The document recommends managers forecast cash flow to plan for needs and avoid insolvency.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    557 views3 pages

    IGCSE Business Studies Chapter 08 Notes

    Uploaded by

    emonimtiaz
    The document discusses cash flow planning and management. It defines cash flow as the flow of money in and out of a business from sources like sales, borrowing, and investments, and uses like purchases, wages, and loan repayments. It explains the cash flow cycle and how longer cycles can require more working capital. It also distinguishes cash flow from profit, noting that a profitable business can run out of cash through issues like slow customer payments, overinvestment, or overtrading. The document recommends managers forecast cash flow to plan for needs and avoid insolvency.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    The key takeaways from the chapter are that cash flow refers to the movement of money in and out of a business, and it is important for businesses to plan their cash flow to avoid insolvency. A cash flow statement can help managers understand if and when a business may run into cash flow issues.

    Cash flow refers to the movement of money in and out of a business. Some examples of cash inflows are the sale of goods/assets for cash and borrowing money. Some examples of cash outflows are purchasing goods/assets, paying wages, and repaying loans/creditors.

    While profit takes into account credit owed to the business, cash flow only considers actual cash received and spent. A business can be profitable but still experience cash flow issues if too much profit is tied up in credit owed by debtors. This is called insolvency.

    37

    Chapter 8: Cash flow planning


    What is meant by cash flow?

    Cash is a liquid asset, meaning that i 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". These are ways
    cash flow can occur:

    Cash inflows:

     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

    Cash outflows:

     Purchasing goods for cash.


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

    Cash flow cycle

    A cash flow cycle explains the stages that are involved in the process of cash out and finally into
    the business. This is what happens:

    The longer it takes for cash to get back to the business, the more they will need working
    capital to pay off their short-term debts. This cycle also helps us understand
    the importance of cash flow planning. This is what happens when a company is short on cash:

     Not enough to pay for materials, therefore sales will fall.


     The company will want to insist customers on paying in cash, but they might lose them to
    competitors who let them pay in credit.
     There could be a liquidity crisis when it does not have enough cash to pay
    for overheads (bills, rent, etc.) and the business might be forced to close down by its
    creditors.

    Managers need to plan their cash flow so that they do not end up in these positions.
    38

    Cash flow is not profit!

    First we need to examine the formula for cash flow:

    Cash flow = Cash inflow - Cash outflow

    However, when calculating profit, we also take into account credit that debtors owe us.
    Therefore, a company might make $20,000 in profit but only $10,000 is received in cash because
    half of it is payed by credit card.

    This creates something known as insolvency:

     Profitable business could run out of cash because of various reasons. This is
    called insolvency and it is one main reason why businesses fail.
     This can be because of several reasons:
    o Allowing customers too long to pay back, so that they will not have paid off the
    debts yet by the time the business has run out of cash.
    o Purchasing too many assets at once.
    o Producing or purchasing too much stock/inventory when expanding too quickly.
    This is called overtrading.

    Here is an example of a cash flow statement:

    As you can see, the closing bank balance in February is negative, which means that it has
    become overdrawn.

    Cash flow forecasts

    Because of the aforementioned problems, it is important for the manager to get an idea of how
    much cash will be available for which months. A cash flow forecast can tell the manager:

     How much cash is available for paying bills, loans and other fixed assets.
     How much the bank might need to lend to avoid insolvency.
     Whether the business has too much cash which could be more useful if used.

    Uses of cash flow forecasts:

     Starting up a business: In the first months of a business, a lot of capital will be needed to
    set it up properly. The problem is, not everybody realises that the amount of money they
    needed is much more than they had expected. Therefore, a cash flow forecast will give
    them a better idea of how much money will be needed.
    39

     Keeping the bank manager informed: It needs to be shown to the bank to inform it of
    the size of the needed loan/overdraft, when it is needed, how long it is needed and when it
    could be repaid. Only then will the bank give you a chance to get a loan.
     Running an existing business: It is important to know the cash flow of a business so that
    loans could be arranged in advance in order to get the least interest possible. If a firm has
    cash flow problems and goes to the bank for a loan for the next day, it will charge high
    interests because it knows that the business has no choice. Also, if a business exceeds
    the overdraft limit without informing the bank, it could be asked to repay the overdraft
    immediately and could result in closure of the business.
     Managing cash flow: If a business has too much cash, it should put the cash to some
    good use quickly. Some examples of this is: repaying all loans for less interest, paying
    creditors immediately to get discounts.

    How can cash flow problems be solved?

    Here are some steps to solve cash flow problems:

     Arrange for future loans with the bank when you anticipate negative cash flow.
     Reduce or delay planned expenses until cash is available, e.g. ask to pay in credit.
     Increasing forecasted cash inflow, e.g. by getting a part-time job.

    For more information on the importance of cash flow visit page 132 in the book. This case study
    will give you a lot of information. As for the time being, thats the end of chapter 8!
    ================================================================

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