For this chapter, you should be able to...
1. distinguish between profit and cash flow
2. explain the working capital
3. construct and interpret cash-flow forecasts
4. comment on the relationship between investment, profit and cash flow
5. evaluate possible strategies for dealing with cash-flow problems.
1. distinguish between profit and cash flow
2. explain the working capital
3. construct and interpret cash-flow forecasts
4. comment on the relationship between investment, profit and cash flow
5. evaluate possible strategies for dealing with cash-flow problems.
1. difference between profit and cash flow
Cash = money that gets into the business through either the sale of its goods or services
= the most liquid asset in a business and is found under current assets in the balance sheet
= essential to the smooth running of any business
Cash flow = money that flows in and out of a business over a given period of time
= a key indicator of a firm's ability to meet its financial obligation
= positive cash flow will enable businesses to meet their day-to-day running costs
Profit = obtained by subtracting total costs from total revenue
= great indicator of the financial success of a firm's core operations
Profit and cash flow are different.
= the most liquid asset in a business and is found under current assets in the balance sheet
= essential to the smooth running of any business
Cash flow = money that flows in and out of a business over a given period of time
= a key indicator of a firm's ability to meet its financial obligation
= positive cash flow will enable businesses to meet their day-to-day running costs
- Cash inflows = the money received by a business
- Cash outflows = money paid out by a business over a period of time
Profit = obtained by subtracting total costs from total revenue
= great indicator of the financial success of a firm's core operations
Profit and cash flow are different.
- A business can be profitable but have little or no cash
- A business can have a positive cash flow but be unprofitable
2. working capital
Working capital = money needed to pay for the day-to-day running cots of a business.
= includes paying wages, purchasing raw materials, and paying for electricity and gas
= also known as net current assets
Formula: Working capital = current assets - current liabilities
Current assets = liquid assets of the business, including cash, debtors and stock
Current liabilities = money the business owes that need to be paid in the short term, including creditors and bank overdrafts
To have sufficient working capital, businesses need to ensure that their current assets exceed their current liabilities.
Working capital cycle = the period of time between payment for goods supplied to a business and the business receiving cash from their sale.
= includes paying wages, purchasing raw materials, and paying for electricity and gas
= also known as net current assets
Formula: Working capital = current assets - current liabilities
Current assets = liquid assets of the business, including cash, debtors and stock
Current liabilities = money the business owes that need to be paid in the short term, including creditors and bank overdrafts
To have sufficient working capital, businesses need to ensure that their current assets exceed their current liabilities.
Working capital cycle = the period of time between payment for goods supplied to a business and the business receiving cash from their sale.