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Unit 3
TOPIC: Cash-flow Forecasting And Working Capital
PAGE(S): 258—267
The Importance of Cash and Cash-flow forecasting
💡
There is a saying ‘cash is
king’. A business needs KEY WORDS
cash. Without it, the
Cash-flow forecast: an estimate of the future cash
business will not be able to
inflows and outflows of a business.
pay:
working capital: measures the liquidity of the
1. its employees’ wages.
business
2. its suppliers for goods
Liquidity: the ability of a business to pay it’s short
and services.
term debts
3. rent, heating and lighting
credit sales: goods sold to customers who will pay
and other costs for its
for these at an agreed date in the future
premises.
Positive cash Negative cash
It is better to have a positive cash flow as any temporary cash
flow: flow: shortage may cause problems for the business and result in
an increase in borrowing costs.
inflow:$$$ inflow: $
outflow:$ outflow:$$$ To prevent a negative net cash flow, businesses need an
accurate forecast of the size and timing of cash inflows and
cash outflows.
Financing short term cash shortages: Businesses that don’t have a working capital will be
illiquid, this means that they cannot pay their short
ask trade receivables to pay for
term debts.
goods more quickly by offering
discounts to customers who have working capital cycle:
sold goods.
Cash → Inventories purchased on credit →
negotiate longer credit terms with Production of goods for sale → Goods sold to
suppliers. customers on credit.
delay the purchase of non-current
assets till cash flow improves.
Length of working capital cycle depends on:
find other sources of finance for the
level of inventories held by a business and how
purchase of non-current assets.
good suppliers are paid.
how long it takes to produce goods for sale.
Formulas:
Unit 3 1
Unit 3
TOPIC: Cash-flow Forecasting And Working Capital
PAGE(S): 258—267
The Importance of Cash and Cash-flow forecasting
💡
There is a saying ‘cash is
king’. A business needs KEY WORDS
cash. Without it, the
Cash-flow forecast: an estimate of the future cash
business will not be able to
inflows and outflows of a business.
pay:
working capital: measures the liquidity of the
1. its employees’ wages.
business
2. its suppliers for goods
Liquidity: the ability of a business to pay it’s short
and services.
term debts
3. rent, heating and lighting
credit sales: goods sold to customers who will pay
and other costs for its
for these at an agreed date in the future
premises.
Positive cash Negative cash
It is better to have a positive cash flow as any temporary cash
flow: flow: shortage may cause problems for the business and result in
an increase in borrowing costs.
inflow:$$$ inflow: $
outflow:$ outflow:$$$ To prevent a negative net cash flow, businesses need an
accurate forecast of the size and timing of cash inflows and
cash outflows.
Financing short term cash shortages: Businesses that don’t have a working capital will be
illiquid, this means that they cannot pay their short
ask trade receivables to pay for
term debts.
goods more quickly by offering
discounts to customers who have working capital cycle:
sold goods.
Cash → Inventories purchased on credit →
negotiate longer credit terms with Production of goods for sale → Goods sold to
suppliers. customers on credit.
delay the purchase of non-current
assets till cash flow improves.
Length of working capital cycle depends on:
find other sources of finance for the
level of inventories held by a business and how
purchase of non-current assets.
good suppliers are paid.
how long it takes to produce goods for sale.
Formulas:
Unit 3 1
