Cash vs. Profit
Business can exist without making profits but a business cannot exist without a cash.
Cash and profit are not the same thing:
Business may sell goods at a profit - until customer pays there is no increase in cash.
Profit reflects adjustment for things like depreciation that do not involve cash at all.
Cash increase new investment by shareholders or raising finance neither which affects the
operating profit.
o Depreciation is a non-cash expense - it only affects profit not cash.
Cash Flow Forecasting:
Firms experiencing cash flow crises are likely to be:
o Small in size or recently on credit.
o Trading frequently on credit.
o Expanding without adequate resources or financial planning.
Likely to be more accurate:
o Relevant data available.
o Few unexpected events.
o Debtors pay on time.
o Cash flow forecast is for the ST not LT.
Ways of improving cash flow:
o Standby finance already arranged e.g. overdraft.
o Customers checked carefully before credit gave.
o Assets sold and leased back.
o Cash sales generated via discounts.
o Managers planned their cash flow requirements carefully.
A business need work capital = finance available for the day to day running of a business.
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Poor Credit Sales +
Control leaseback
Cut non-
Tight credit
Overtrading Bad Debts essential
Sources
policy Ways of expenditure
of cash Improvin
flow g
Problems Liquidity
Use of cash
Unforeseen Falling Calling in
flow
expenditure Sales debtors
forecasts
Business can exist without making profits but a business cannot exist without a cash.
Cash and profit are not the same thing:
Business may sell goods at a profit - until customer pays there is no increase in cash.
Profit reflects adjustment for things like depreciation that do not involve cash at all.
Cash increase new investment by shareholders or raising finance neither which affects the
operating profit.
o Depreciation is a non-cash expense - it only affects profit not cash.
Cash Flow Forecasting:
Firms experiencing cash flow crises are likely to be:
o Small in size or recently on credit.
o Trading frequently on credit.
o Expanding without adequate resources or financial planning.
Likely to be more accurate:
o Relevant data available.
o Few unexpected events.
o Debtors pay on time.
o Cash flow forecast is for the ST not LT.
Ways of improving cash flow:
o Standby finance already arranged e.g. overdraft.
o Customers checked carefully before credit gave.
o Assets sold and leased back.
o Cash sales generated via discounts.
o Managers planned their cash flow requirements carefully.
A business need work capital = finance available for the day to day running of a business.
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Poor Credit Sales +
Control leaseback
Cut non-
Tight credit
Overtrading Bad Debts essential
Sources
policy Ways of expenditure
of cash Improvin
flow g
Problems Liquidity
Use of cash
Unforeseen Falling Calling in
flow
expenditure Sales debtors
forecasts
