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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



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