A look at the different between cash and profit.
The importance of cash.
Cash Flow Forecasting.
How to work out working capital.
Methods of Solving Working Capital.
The Working Capital Cycle.
Business can exist without making profits but a business cannot exist without a cash.
Cash and profit are not the same thing:
Business may sell goods at a profit - until customer pays there is no increase in cash.
Profit reflects adjustment for things like depreciation that do not involve cash at all.
Cash increase new investment by shareholders or raising finance neither which affects the
operating profit.
o Depreciation is a non-cash expense - it only affects profit not cash.
Cash Flow Forecasting:
Firms experiencing cash flow crises are likely to be:
o Small in size or recently on credit.
o Trading frequently on credit.
o Expanding without adequate resources or financial planning.
Likely to be more accurate:
o Relevant data available.
o Few unexpected events.
o Debtors pay on time.
o Cash flow forecast is for the ST not LT.
Ways of improving cash flow:
o Standby finance already arranged e.g. overdraft.
o Customers checked carefully before credit gave.
o Assets sold and leased back.
o Cash sales generated via discounts.
o Managers planned their cash flow requirements carefully.
A business need work capital = finance available for the day to day running of a business.
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