Page 261 - Cambridge IGCSE Business Studies

20: Cash-flow forecasting and working capital

TOP TIP Dozens of Swissair aircraft stood grounded at Zurich Unique Airport. Flights
Cash is not the same as profit could not take off due to the simple lack of cash fl ow. So little was available
so make sure you understand

the difference. A profitable firm that there wasn’t enough money to pay for jet fuel.
can run out of cash. If it does,
and cannot pay its debts, then
even though it is profitable it
might still not be able to survive. What is a cash-flow forecast?
In the short run, cash is more
All business activity results in either a flow of cash into the business or a fl ow of

important than profit.

cash out of the business. The survival of any business depends on the cash infl ows
being greater than the cash outfl ows.

Positive Cash Flow Negative Cash Flow
EXPLORE!
Cash inflow Cash inflow
Investigate new businesses that
have set up in your area. $
Why did they need cash in the $$$
first few months of trading?
Prepare a diagram showing
the cash inflows and the cash
outflows of the business.

Cash outflow Cash outflow
259
$
$$$

Figure 20.1 Positive and negative cash flow

It is better to have a positive cash flow as any temporary cash shortage
may cause problems for the business and result in an increase in borrowing
costs.

To prevent a negative net cash flow businesses need an accurate forecast

KEY TERMS of the size and timing of cash inflows and cash outfl ows. Th is cash-fl ow forecast
enables businesses to identify any future time periods when cash shortages
Cash-flow forecast: an estimate
may occur.
of the future cash inflows and
outflows of a business.
Net cash flow: cash inflow Constructing a simple cash-flow forecast
minus cash outflow.
Th e cash-flow forecast in Figure 20.2 shows the amount of cash infl ow

and outflow each month. Th e difference between the monthly infl ow and

outflow is called net cash flow. For example, in January the business expects to

receive a $10,000 cash inflow, but in the same month expects a $7,000 cash

outfl ow. This means that in January there will be a net cash fl ow of $3,000
($10,000 – $7,000).