1.6.4 Cash flow and Business survival Flashcards
What is cash flow in a business?
Cash flow is the cash coming in and out of a business at a specific period of time. Cash flow forecasts are made by businesses based off predictions to see where cash will be entering and leaving the business in the future.
Explain the importance of cash flow for business survival
A business must have positive cash flow no matter its level of profit as if there is no cash flow, the business will have to shut down becuase it cant pay off its expenses as there is no cash.
Profits are not spent in a firm but cash is and if a firm has heavy stock holdings where there cash is mostly tied up in assets, then it cannot afford to pay its expenses.
When firms need to pay expenses such as bills, wages they need liquid cash hence a positive cash flow.
How can cash flow forecasts be useful?
Can predict when there might be any shortfall of cash allowing for actions to be put in place to prepare for it. Also can predict when they expect cash to be coming in from debtors and when they expect to pay to creditors such as suppliers or banks.
What are some limitations of cash flow forecasts?
Solely based off predictions there may not be the most accurate. Also, unforseen expenses which cannot be expected will not be taken into account.
Also competitors and how they may change the market are not accounted for. No external factors are accounted for e.g seasonal activity so cash flow forecasts may be inaccurate at certain times of the year.
