3.7: Cash Flow
The difference between profit and cash flow:
●
Profit is the difference between revenue and expenses over a period of time, while cash flow refers
to the movement of money in and out of a business.
Cash-flow forecasts:
●
●
●
The structure of a cash-flow forecast
○ Cash-flow forecasts typically include cash inflows (e.g. sales revenue, loans, investments)
and outflows (e.g. wages, rent, taxes) over a given period of time, typically a month or a
year.
Why do businesses forecast cash flows?
○ Cash-flow forecasts help businesses plan and manage their finances, identify potential
problems and opportunities, and make informed decisions about investments and
financing.
Interpreting and amending cash-flow forecasts
○ Businesses should regularly review and adjust their cash-flow forecasts based on actual
cash flows, changes in business conditions, and other factors that may impact cash inflows
and outflows.
The relationship between investment, profit, and cash flow:
●
●
Investment and cash flow
○ Investment in assets or operations can result in significant cash outflows, which may
impact cash-flow forecasts and short-term liquidity. However, investments can also
generate long-term cash inflows through increased revenue and profits.
Investment and profit
○ Investments can also impact profits, as they may require significant upfront costs that may
not be immediately recouped through revenue or cost savings. However, profitable
investments can lead to increased revenue and profits over time.
Strategies for dealing with cash-flow problems:
●
●
Causes of cash-flow problems
○ Cash-flow problems may arise due to a variety of factors, including poor financial
management, slow-paying debtors, unexpected expenses, and declining sales.
Dealing with cash-flow problems
○ Strategies for dealing with cash-flow problems include:
■ reducing costs (e.g. by renegotiating supplier contracts or cutting non-essential
expenses)
■ improving the management of debtors and creditors (e.g. by offering discounts for
early payments or renegotiating payment terms)
■ debt factoring (selling invoices to a third-party for a fee)
■ arranging short-term borrowing (e.g. overdrafts or lines of credit)
■ sale and leaseback (selling assets and leasing them back)
■ leasing (renting assets instead of buying them outright)
■
●
hire purchase (buying assets on credit and paying for them over time).
Example
○ A business facing cash-flow problems may decide to reduce costs by laying off staff or
cutting back on marketing expenses. Alternatively, they may try to improve the
management of debtors by offering incentives for early payments or tightening credit
policies. In more severe cases, the business may need to consider more drastic measures
such as selling assets or restructuring debt.