1.3.3 Cash and cash-flow
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The importance of cash to a business:
● to pay suppliers, overheads and employees ● to prevent business failure (insolvency) ● the difference between cash and profit. |
Calculation and interpretation of cash-flow forecasts:
● cash inflows ● cash outflows ● net cash flow ● opening and closing balances. |
Starter: What happens if you do not have any cash?
How does Apple benefit from its cash mountain?
How does Apple benefit from its cash mountain?
Importance of cash
Cash is needed by a business for a number of reasons. Primarily cash is needed to pay workers, suppliers and for overheads. What happens if these bills can not be paid?
If a business cannot pay any of these outgoings it risks insolvency.
Why does DFS run a risk of this problem even if sales suggest it is highly profitable?
If a business cannot pay any of these outgoings it risks insolvency.
Why does DFS run a risk of this problem even if sales suggest it is highly profitable?
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Liquidity Vs Solvency
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DFS Rockstar advert
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Difference between Cash & Profit
● Profit is recorded straight away after a sale.
● Cash (inflows and outflows) is recorded as and when it is received or is spent.
● Cash (inflows and outflows) is recorded as and when it is received or is spent.
Cash-flow
The principle of cash-flow is important. Cash flows into a business as receipts; for example, from the sale of products or from loans. These are cash inflows. On the other hand, cash flows out of a business as payments; for example, for wages, suppliers, loans and advertising. These are cash outflows. Net cash flow is the difference between cash inflows and cash outflows.
A business where net cash flow is negative over a period of time may well be under threat of insolvency.
A business where net cash flow is negative over a period of time may well be under threat of insolvency.
