Page 260 - Cambridge IGCSE Business Studies

20 Cash-flow forecasting
Objectives
In this chapter you will
learn about:
■ the importance of cash to
businesses
■ cash-flow forecasting
■ how businesses deal with
short-term cash-flow
problems
■ the importance of working
capital to businesses.
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and working capital
Introduction
Business owners, especially those setting up a new business, need to understand
the importance of cash. Making a profit is good but it is cash that will pay the bills!
Cash-flow management is essential to all businesses’ survival. Surveys of failed
businesses show that for more than half of these the main reason for failure was
poor cash-flow management.
In this chapter you will study the importance of cash to a business, and how it can
be effectively managed and what businesses might do if faced with the problem of
temporary cash shortages.
The importance of cash and cash-flow
forecasting
Why cash is important to businesses
There is a saying ‘cash is king’. A business needs cash. Without it, the business will
not be able to pay:
■ its employees’ wages
■ its suppliers for goods and services
■ rent, heating and lighting and other costs for its premises.
Without cash, a business will fail.
How does a business make sure it has enough cash to pay its bills? Most
businesses operate cash-flow management, which means that they have the
finance whenever they need it to pay their employees, or their suppliers, and so on.
Managing a business’s cash flow involves making sure that enough cash is coming in
to the business to cover the cash that goes out of the business. For example, is there
enough cash from the sale of goods to cover the amount needed to pay suppliers?
Here are some examples of businesses that failed because their owners did not
manage the business’s cash fl ow well.
Chinese home electronics company, Dong Guan Yufeng Co. Ltd., used its
short-term cash fl ow to repay business debts. This left it without enough cash
to pay bank loans and suppliers – the business failed.
African catering business, Premier Catering Supplies Ltd., used cash to buy
shares in other companies. Eventually, it ran out of cash. Workers complained
about not being paid, and the business failed.