3.7 Cash Flow

"This is one of, if not the most important, things that businesses need to know. Not understanding this, is one of the primary reasons that a business fails - Profit has nothing to do with cash flow"

- Mr E. Owen (circa 2018)

Working Capital Cycle:

1. Cash is on hand

2. Pay for raw materials

3. Pay manufacturing costs (i.e. wages)

4. Get cash from people buying your products

Types of Working Capital Cycles:

  • Example: Fruit Vendor

    • Approximately 24 hour turnover

    • Little need to have finance for working capital

  • Example: Ship Manufacturer

    • VERY LOOOONG turnover

    • Big need for finance for working capital

Benefits of good working capital:

    • Goodwill with investors, customers, shareholders, etc

    • Less reliance on borrowing (and therefore less interest)

    • Easier ability to deal with opportunities and crisis

Notes:

    • The money it has on hand for day to day business (cash)

    • If the cash gotten from revenues exceeds your costs, you get positive cashflow

    • Cashflow forecasting allows companies to predict when they're business may have negative cashflow

      • This allows them to possibly ask for trade

    • What is Working Capital = The funds available for day-to-day operations of an organisation

      • Working Capital = Current Assets - Current Liability

        • Current Assets = Anything the business owns for less than a year

        • Current Liability = Anything the business owes in less than a year

Cash

  • The money/capital the business has

  • Calculated by

Cash Balance = Total Cash Inflows vs Total Cash Outflows

Profit

  • The surplus of money received after selling a product

  • Calculated by

Profits = Revenue - Total Cost

Example: Cafe Lucchini