MODULE 5
CASH FLOW STATEMENTS
INTRODUCTION
Cash flow refers to the movement of money in and out of a business. A positive cash flow can keep a
business afloat, whereas a negative cash flow can sink it very quickly. In fact, poor cash flow is a
major reason why many businesses don’t make it past the first year.
In order to maintain a healthy cash flow, the business must ensure that cash is coming in steadily and
in time in order to pay its suppliers, salaries, and other regular monthly expenses. When a business is
experiencing cash flow problems it might be forced to make use of its overdraft facility. This is a
temporary solution as the bank is now owed the money, and they will of course charge interest.
SOME CAUSES OF CASH FLOW
PROBLEMS
Disorganised books
This often results in supplier payment dates being missed or debtors not paying on time. The
following is a report from a local accounting firm:
“We had a client who was running a successful small business. He was a good businessman and
charged a fair rate for his services. However, he started to fall behind with his payments to his
suppliers, and as a result received a number of letters of demand. He came to us for advice. We found
that some problem areas were inconsistent invoice numbering and no proper record of which
customers had paid. We spent time reconciling his overlooked invoices, only to discover significant
sums of money that had never been received. We then spent time helping him put a good system in
place. That meant a strong cash flow and no more letters of demand.”
Out-of-sync credit terms
If debtors are given 30 days to pay but suppliers give only 14 days, then a cash flow problem may
build up and worsen over time.
Lack of cash flow forecasting
It is vital that a business prepares an effective cash budget as this will enable them to see in which
months they can expect a cash deficit, which will allow them to adjust their expenditure.
Over-investment in fixed assets and stock
Fixed assets are hard to turn back into cash in the short term and holding too much stock ties up cash.
68
, THE DIFFERENCE BETWEEN PROFIT AND CASH
FLOW
Profit is the difference between incomes and expenses. According to the matching concept, income
is calculated at the time the sale is made, rather than when payment is received. Likewise, an expense
is calculated at the time the expense is incurred, rather than when the amount is paid.
Cash flow is the difference between the inflows and outflows of cash. An inflow is calculated at the
time the cash is actually received, and an outflow is calculated at the time the cash is actually paid.
EXERCISE
5.1
This is an introductory exercise and will help you understand cash flow concepts better.
Required:
Study the following information and state the amount that would appear in each of the Financial
Statements on 31 December 20.9.
The following amounts were extracted from the Pre-adjustment Trial Balance of a company on
31 December 20.9, the financial year-end:
Rent expense R11 000
Equipment R50 000
Accumulated depreciation R10 000
Vehicles R60 000
Accumulated depreciation R40 000
Loan R80 000
Fixed deposit R25 000
Creditor’s control R20 000
Adjustments:
1. One month’s rent is still owing for the financial year.
2. Depreciation on the equipment for the year was calculated at R5 000.
3. Sold the vehicle at its carrying value and received a cheque.
4. The annual statement reflected interest of R3 000 capitalised to the loan.
5. The fixed deposit matured. R27 000 was received from the bank in this regard.
6. Paid one of the creditors R3 000.
Note: under the Cash Flow Statement column indicate an outflow of cash with a bracket
Statement of Cash Flow
Comprehensive Statement
Income
Rent
Depreciation
Sale of vehicle
Interest on loan
Fixed deposit
69
, Creditors
70
CASH FLOW STATEMENTS
INTRODUCTION
Cash flow refers to the movement of money in and out of a business. A positive cash flow can keep a
business afloat, whereas a negative cash flow can sink it very quickly. In fact, poor cash flow is a
major reason why many businesses don’t make it past the first year.
In order to maintain a healthy cash flow, the business must ensure that cash is coming in steadily and
in time in order to pay its suppliers, salaries, and other regular monthly expenses. When a business is
experiencing cash flow problems it might be forced to make use of its overdraft facility. This is a
temporary solution as the bank is now owed the money, and they will of course charge interest.
SOME CAUSES OF CASH FLOW
PROBLEMS
Disorganised books
This often results in supplier payment dates being missed or debtors not paying on time. The
following is a report from a local accounting firm:
“We had a client who was running a successful small business. He was a good businessman and
charged a fair rate for his services. However, he started to fall behind with his payments to his
suppliers, and as a result received a number of letters of demand. He came to us for advice. We found
that some problem areas were inconsistent invoice numbering and no proper record of which
customers had paid. We spent time reconciling his overlooked invoices, only to discover significant
sums of money that had never been received. We then spent time helping him put a good system in
place. That meant a strong cash flow and no more letters of demand.”
Out-of-sync credit terms
If debtors are given 30 days to pay but suppliers give only 14 days, then a cash flow problem may
build up and worsen over time.
Lack of cash flow forecasting
It is vital that a business prepares an effective cash budget as this will enable them to see in which
months they can expect a cash deficit, which will allow them to adjust their expenditure.
Over-investment in fixed assets and stock
Fixed assets are hard to turn back into cash in the short term and holding too much stock ties up cash.
68
, THE DIFFERENCE BETWEEN PROFIT AND CASH
FLOW
Profit is the difference between incomes and expenses. According to the matching concept, income
is calculated at the time the sale is made, rather than when payment is received. Likewise, an expense
is calculated at the time the expense is incurred, rather than when the amount is paid.
Cash flow is the difference between the inflows and outflows of cash. An inflow is calculated at the
time the cash is actually received, and an outflow is calculated at the time the cash is actually paid.
EXERCISE
5.1
This is an introductory exercise and will help you understand cash flow concepts better.
Required:
Study the following information and state the amount that would appear in each of the Financial
Statements on 31 December 20.9.
The following amounts were extracted from the Pre-adjustment Trial Balance of a company on
31 December 20.9, the financial year-end:
Rent expense R11 000
Equipment R50 000
Accumulated depreciation R10 000
Vehicles R60 000
Accumulated depreciation R40 000
Loan R80 000
Fixed deposit R25 000
Creditor’s control R20 000
Adjustments:
1. One month’s rent is still owing for the financial year.
2. Depreciation on the equipment for the year was calculated at R5 000.
3. Sold the vehicle at its carrying value and received a cheque.
4. The annual statement reflected interest of R3 000 capitalised to the loan.
5. The fixed deposit matured. R27 000 was received from the bank in this regard.
6. Paid one of the creditors R3 000.
Note: under the Cash Flow Statement column indicate an outflow of cash with a bracket
Statement of Cash Flow
Comprehensive Statement
Income
Rent
Depreciation
Sale of vehicle
Interest on loan
Fixed deposit
69
, Creditors
70
