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