Cash Flow
Keep a Personal Checklist:
What are the differences between cash and profits?
Why might a profitable business lack cash, whilst a business with cash might lack profit?
What is meant by working capital?
Distinguish between insolvency and liquidity.
What are the three components of current assets
Distinguish between current assets and current liabilities.
What are the stages in a simple working capital cycle?
Distinguish between cash inflows, cash outflows and net cash flows.
Why do businesses produce cash flow forecasts?
Explain the link between a firms closing balance and its opening balance in a cash flow forecast.
What are the main causes of cash flow problems
What is the relationship between investment, profit and cash flow?
What are the three generic ways that a firm can deal with cash flow problems?
What are the imitations of cash flow forecasting?
Cash
Profit
This can be confusing. But, it's important to understand that there is a fundamental difference between cash and profit, and each requires separate management.
It is POSSIBLE that a profitable company runs out of cash!
It is POSSIBLE that a company with a lot of cash is not profitable!
The Working Capital Cycle
A Working Capital Cycle is the period of time between payment of goods supplied to a business and the business receiving cash from their sale.
For most businesses, there is a delay between paying for costs of production (such as the purchase of stock and payment of wages) and receiving the cash from selling their products. This is because the production process takes time
Working capital refers to the cash or liquid assets available for the daily running of a business.
It shows the funds that are available for a business to pay for its immediate costs and expenditure, e.g. raw materials, wages and paying suppliers.
A lack of working capital means that the firm has insufficient cash to fund its routine operations.
Cash Flow Forecast [AO4]
What are some sources of cash inflows and what are some sources of cash outflows?
Watch this short tutorial to help you set up a Cash Flow Forecast Spreadsheet on Google Sheets.
Cash Flow Considerations [AO3] 👁️👁️
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Wanna know what the real cost to open a McDonald's franchise restaurant?
"The average McDonald's restaurant generates nearly $2.7 million in annual sales; But to open a single restaurant, the company requires that potential franchisees have liquid assets of at least $500,000.
Startup costs, which include construction and equipment expenses, average between $1 million and $2.2 million, according to McDonald's. The total is determined by the geography and size of the restaurant, as well as by the selection of kitchen equipment, signage, style of decor, and landscaping, the company says.
Franchisees must pay 40% of the startup costs with cash and other non-borrowed resources, while the rest can be financed.
In addition to those costs, McDonald's charges a $45,000 franchisee fee and an ongoing monthly service fee equal to 4% of gross sales. Franchisees must also pay rent to the company, which is a percentage of monthly sales."
Peterson, H. (2019). Here's what it costs to open a McDonald's restaurant. Business Insider. Retrieved from: Link
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