Business igcse (0450)
Section 5 Cash Flow Forecasting and working
capital
Cash is considered a liquid asset - this means that it is
immediately available for spending on goods and services.
Cash flow is the flow of money into and out of a business over
a certain time. Now a business can face cashflow problems.
For example: the business has too little cash or runs out of it
completely. They will face problems such as:
Þ Being unable to pay services.
Þ Production of goods will stop.
Þ The business will be forced into liquidation - this means
that they sell everything to cover their debts
What is meant by cash flow?
Þ Cash inflow - how can cash flow into a business.
Þ The sale of products for cash.
Þ Debtors paying back
Þ borrowing money from an external source - Although a
business must be careful with that one because they will
have to pay that external source back, most likely with
interest as well.
Þ The sale of assets.
Þ Investments.
Þ Cash outflow – how cash can flow out of business.
Þ Purchasing goods or materials.
Þ Paying expenses.
Þ Repaying loans.
Þ Purchasing non-current assets.
Þ Paying back creditors (You have bought a good on credit
and now you need to repay that business back.)
, Cash flow cycle.
Explains why cash paid out is not returned immediately to the
business.
1. Cash needed to 2. Materials, rent,
pay for wages, etc
5. Cash payment 3. Goods
received produced
4. Goods sold
The diagram shows how cash is needed to pay for materials
and other costs required to produce the product. Time is also
needed to produce the products before they can be sold to the
customer. If the customer is buying on credit, you will not get
the cash straight away. If they do pay in cash, you can use that
cash to pay for future materials.
We need to remember that cash flow is not the same as profit.
Section 5 Cash Flow Forecasting and working
capital
Cash is considered a liquid asset - this means that it is
immediately available for spending on goods and services.
Cash flow is the flow of money into and out of a business over
a certain time. Now a business can face cashflow problems.
For example: the business has too little cash or runs out of it
completely. They will face problems such as:
Þ Being unable to pay services.
Þ Production of goods will stop.
Þ The business will be forced into liquidation - this means
that they sell everything to cover their debts
What is meant by cash flow?
Þ Cash inflow - how can cash flow into a business.
Þ The sale of products for cash.
Þ Debtors paying back
Þ borrowing money from an external source - Although a
business must be careful with that one because they will
have to pay that external source back, most likely with
interest as well.
Þ The sale of assets.
Þ Investments.
Þ Cash outflow – how cash can flow out of business.
Þ Purchasing goods or materials.
Þ Paying expenses.
Þ Repaying loans.
Þ Purchasing non-current assets.
Þ Paying back creditors (You have bought a good on credit
and now you need to repay that business back.)
, Cash flow cycle.
Explains why cash paid out is not returned immediately to the
business.
1. Cash needed to 2. Materials, rent,
pay for wages, etc
5. Cash payment 3. Goods
received produced
4. Goods sold
The diagram shows how cash is needed to pay for materials
and other costs required to produce the product. Time is also
needed to produce the products before they can be sold to the
customer. If the customer is buying on credit, you will not get
the cash straight away. If they do pay in cash, you can use that
cash to pay for future materials.
We need to remember that cash flow is not the same as profit.
