Cash flow and why it matters
Cash flow is the movement of money into and out of a business over time. Cash inflows are receipts such as sales revenue and loans received. Cash outflows are payments such as wages, rent and buying materials. A business can be profitable yet still fail if it runs out of cash to pay its bills — this is why cash flow is watched closely.
Key idea
Net cash flow = total cash inflows − total cash outflows. Closing balance = opening balance + net cash flow. The closing balance of one month becomes the opening balance of the next.
The cash flow forecast
A cash flow forecast predicts future inflows and outflows so managers can spot months where cash may run short and arrange finance in advance, for example an overdraft. It also helps when applying for a loan.
Example
Opening balance is RM500. Inflows are RM3000 and outflows are RM3200. Net cash flow = 3000 − 3200 = −RM200. Closing balance = 500 + (−200) = RM300.
Working capital
Working capital is the money available for day-to-day running. A business short of working capital cannot pay wages or suppliers on time. Firms improve cash flow by chasing customers who owe money, delaying payments where possible, or arranging short-term finance.
Key idea
Working capital = current assets − current liabilities. It shows whether a firm can meet its short-term debts.
Remember
- Net cash flow = inflows − outflows.
- Closing balance = opening balance + net cash flow.
- Profit is not the same as cash; a profitable firm can still run out of cash.