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3.7 Cash Flow Statement

The document discusses the distinction between cash flow and profit, emphasizing that cash flow reflects the movement of money in and out of a business, while profit shows the remaining amount after expenses. It covers working capital, its cycle, liquidity, and the impact of investments on cash flow, highlighting potential cash flow problems such as poor credit control, overstocking, and overtrading. Additionally, it suggests strategies to improve cash flow, including tightening credit controls and enhancing sales efforts.

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17 views18 pages

3.7 Cash Flow Statement

The document discusses the distinction between cash flow and profit, emphasizing that cash flow reflects the movement of money in and out of a business, while profit shows the remaining amount after expenses. It covers working capital, its cycle, liquidity, and the impact of investments on cash flow, highlighting potential cash flow problems such as poor credit control, overstocking, and overtrading. Additionally, it suggests strategies to improve cash flow, including tightening credit controls and enhancing sales efforts.

Uploaded by

gale2025
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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3.

7 CASH FLOW
STATEMENT
Curriculum
Profit vs cash flow
Cash flow shows how much money moves in and out of your business, while profit illustrates how much
money is left over after you've paid all your expenses. Statement: Cash flow is reported on the cash flow
statement, and profits can be found in the income statement.

https://www.digitalocean.com
/resources/article/cash-flow-v
s-profit
Working Capital

Working capital is all about how much CASH is available to meet the daily
expected (and sometimes unexpected) running costs of the business.

Working Capital = Current Assets - Current Liabilities


Current Assets Current Liabilities
Cash (money in the bank) Overdraft (bank account gone into
Debtors (customers that owe negative as a short term loan)
money to the business) Creditors (suppliers the business
Stock (Inventory – goods and owes money to)
raw materials purchased but Short-term borrowing (loans taken
yet to be sold) by the business due to be paid in
the next 12 months)
Working capital cycle
Working Capital Cycle (WCC) is the
time it takes to convert net current
assets and current liabilities (e.g.
purchased stock) into cash. A long cycle
means tying up capital for a longer time
without earning a return. Short cycles
allow your business to free up cash
faster and to be more agile

Businesses typically try to manage


this cycle by selling inventory quickly,
collecting revenue from customers https://corporatefinanceinstitute.com/res
quickly, and paying bills slowly to ources/accounting/working-capital-cycle/

optimize cash flow.


Liquidity Position
Cash flow shows how much money moves in and out of your business, while profit illustrates how much
money is left over after you've paid all your expenses. Statement: Cash flow is reported on the cash flow
statement, and profits can be found in the income statement.

Video: https://www.investopedia.com/terms/l/liquidity.asp

Importance of liquidity
● Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting
its market price.
● Cash is the most liquid of assets, while tangible items are less liquid.
● The two main types of liquidity are market liquidity and accounting liquidity.
● Current, quick, and cash ratios are most commonly used to measure liquidity
Investment, cash flow and profits
Investment is the purchase of capital or productive assets, such as machinery and business premises. The aim of such expenditure is to enable
the production of goods or services that will generate future cash flow and profits for the business. These capital purchases will have a
negative impact on a firm’s cash flow position in the short term, as they represent cash outflows.

The cash flow implications of investment will differ as firms move through their life cycles and as they grow. For start-up businesses, without existing
financial reserves, investment comes with a high risk of insolvency. There are no guarantees that customers will buy sufficient goods and services to
cover the initial costs and then provide a future profit. Cash flow may remain negative and finance providers may require repayments that the firms
cannot fund. The consequence of such liquidity problems is the failure of many small firms in their first few years of operation.

For established firms, there may be sufficient cash from sales revenue or from cash reserves to cover investment costs, especially where firms are
achieving high profit levels.

Source

https://guide.fariaedu.com/business-management-hl/unit-3-finance-and-accounts/cash-flow/the-relationship-between-investment-profit-and-cash-flow-
ao2
Causes for Cash Flow problem
● Poor credit control- Credit control, also called credit policy, is the strategy used by a business to
accelerate sales of products or services through the extension of credit o potential customers or clients.
Generally, businesses prefer to extend credit to those with “good” credit and limit credit to riskier
borrowers who may have a history of delinquency.

● Overstocking- Stocking the correct amount of inventory is a challenging task for many retail store owners.
If you overstock, you’re left with costly excess inventory. If you understock, you miss out on sales.
Knowing how much to stock can be determined through a honed approach to inventory management and
sales data. Without this informed decision making, the effects on your productivity and profitability are
costly.

● Overtrading occurs when a business expands too quickly without the resources to support that growth.
This could be a lack of cash, staff, or production capacity and means the business cannot deliver on its
commitments to employees, suppliers, and customers.
urce :https://www.investopedia.com/terms/c/credit-control.asp,
So

https://www.americanexpress.com/en-gb/business/trends-and-insights/articles/what-is-overtrading-how-to-prevent-it/#:~:text=What%20is
%20overtrading%3F,employees%2C%20suppliers%2C%20and%20customers.

https://www.shopify.com/sg/retail/overstocking-causes-and-prevention
CASH FLOW FORECAST
https://www.youtube.com/watch?v=dLHZy4DWKRM&t=2s&ab_channel=tutor2u
Cash flow
template:
To improve cash flow

● Bring in cash from external sources. This will increase cash


without adding a liability
● Selling dormant assets- old or unused equipment or property
● Long term loan - although difficult if the business has a cash flow
problem
● Debt factoring - this will add cash but reduce the current assets
overall.
● Tighten credit controls - be more stricter with debtors
● Discounts for customers to pay back early
● Improve sales - increase price, promote more, make product
innovative. These may impact costs and demand

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