IGBizStudies

May 26, 20211 min

What is cash-flow and its importance

Updated: Jun 18, 2023

Cash is needed to pay business expenses. Cash flow describes how a business receives cash (cash inflow) and spends it (cash outflow).

A cash-flow forecast is important to every business as it estimates the cash it needs to sustain its business operation. Examples of cash inflow and outflow are;

Cash inflow

  1. Revenue from cash sales

  2. Repayment from customers on trade credit

  3. Sale of assets (non-current assets)

  4. Cash from loan

  5. Profits/dividend from other companies a business own

  6. Issuance of new shares

Cash outflow

  1. Loan repayment

  2. General expenses such as utility bills, rent, insurance

  3. Purchase of assets

  4. Payment to suppliers

  5. Taxes

  6. Wages

  7. Payment for goods and services with cash

NET CASH FLOW = CASH INFLOW - CASH OUTFLOW

A positive net cash flow refers to more cash inflow than outflow. Should there be more cash outflow than inflow (negative net cash flow), a business will need to obtain additional financing to sustain its business operation.

RELATED CONCEPTS

  1. Expenses

  2. Revenue/Sales

  3. Short-term Debt

  4. Trade credit

PAST YEAR QUESTIONS

  1. What is meant by a cash flow forecast? (2 marks) May/June 2018/12

  2. Calculate the values for X and Y: Net Cash Flow & Closing Balance (2 marks) May/June 2018/12, Oct/Nov 2018/12 & May/June 2019/13

  3. Calculate the values for X and Y: Opening Balance & Net Cash Flow (2 marks) May/June 2019/13

  4. What is meant by ‘net cash flow’? (2 marks) Oct/Nov 2018/12

  5. Identify and explain two reasons why a cash flow forecast might be important for BVC. (4 marks) May/June 2019/11

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