Cash Flow – GCSE Business Studies Revision

Definitions

 
  • Cash is money in the bank, notes and coins
  • Insolvency is when a business is unable to pay its debts
  • A business calculates its profit at the end of the year
  • From day-to-day, having cash is more important than having a profit
  • When more money is leaving the business than is going in, its cash flow is negative, or it is ‘operating in the red’

If you don’t have cash:

  • Bills go unpaid and you are taken to court
  • If you don’t pay your rent on time the landlord will evict the business, and it will lose its prime location
  • You are unable to pay your staff reliably so you will lose your best people
  • You can’t pay suppliers so you don’t get supplies, and earn a bad reputation amongst other businesses (and customers, if you can’t get them your products)

Three things that can make it difficult to manage cash

  • Having seasonal sales (for instance, if you only sell easter eggs, you won’t be getting any money for most of the year)
  • Having a few large customers (like if you’re a supplier to one or two massive companies)
  • When you’re still in start-up (cash doesn’t come in until the business is up and running)
  • Forecasting the cash flow in and out of the business bank account is especially important for new businesses, fast-growing businesses and businesses with erratic sales
  • Erratic sales are sales that are all over the place and don’t seem to make a pattern

Calculating it

  • Net cash flow is what’s left each months after you’ve taken away the receipts (money out) from the payments (money in)
  • Opening balance is the amount of money in the bank at the beginning of the month
  • Closing balance is the amount at the end of the month – the opening balance added to the net cash flow
  • Remember: one month’s closing balance is the next month’s opening balance
  • Cash flow is shown in a table like so:
£ April May June July
Receipts 2000 4000 1500 1499
Payments 1000 9000 5000 2000
Net Cash Flow -1000 5000 3500 501
Opening Balance 1000 0 5000 8500
Closing Balance 0 5000 8500 9001

The final closing balance is over nine thousand!
Here’s how to work it out:

Net Cash Flow = PaymentsReceipts
Closing Balance = Opening Balance + Net Cash Flow
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