Study Notes
Cash flow forecasting is crucial for businesses to manage their liquidity and avoid insolvency. It involves predicting cash inflows and outflows to ensure there is enough cash to cover expenses.
- Cash flow — the movement of money into and out of a business over time. Example: A business receives cash from sales and pays cash for expenses.
- Cash inflows — the total amount of money coming into the business during a specific time. Example: Money from sales, loans, or investments.
- Cash outflows — the total amount of money going out of the business during a specific time. Example: Payments for wages, rent, and materials.
- Net cash flow — the difference between cash inflows and outflows each month. Example: If inflows are 8,000, net cash flow is $2,000.
- Opening balance — the amount of cash a business has at the start of the month. Example: If a business starts the month with $5,000, that's the opening balance.
- Closing balance — the amount of cash a business has at the end of the month. Example: If a business ends the month with $7,000, that's the closing balance.
Exam Tips
Key Definitions to Remember
- Cash flow
- Cash inflows
- Cash outflows
- Net cash flow
- Opening balance
- Closing balance
Common Confusions
- Confusing cash flow with profit
- Misunderstanding the impact of credit sales on cash flow
Typical Exam Questions
- What is cash flow? Cash flow is the movement of money into and out of a business over time.
- How do cash inflows differ from cash outflows? Cash inflows are money coming into the business, while cash outflows are money going out.
- Why is cash flow forecasting important? It helps businesses manage liquidity and avoid insolvency.
What Examiners Usually Test
- Understanding the difference between cash flow and profit
- Ability to calculate and interpret cash flow forecasts
- Importance of cash flow in preventing business failure