Positive Cash Flow and No Profit
If the cash comes from sources other than income, such as money from the owner or a loan. These are not income but rather liability.
Negative Cash Flow and High Profits
If owners take cash out of the business to pay personal expenses.
Cash flow vs Profit
- Profit is the revenue remaining after deducting all costs associated with operating the business.
- Cash flow is the amount of money flowing in and out of a business at any given time.
- KEY DIFFERENCE BETWEEN PROFIT AND CASH FLOW IS TIME
- Profit can’t show you the whole picture of how your business is doing financially because it can’t give you a day-to-day understanding of your business’s financial well-being.
Insolvent
When a business cannot meet its short term debts.
Net Cash Flow
The sum of cash payments into a business (inflows) less the sum of cash payments made by it (outflows).
Working Capital
Working Capital = Current Assets - Current Liabilities
Working Capital Cycle
Period of time between spending cash on the production process and receiving cash payments from customers.
Cash Flow Forecast
Produced for internal use within an organisation - not shown to shareholders but may be used to secure a bank loan.
Cash Flow Forecast Uses
- Highlight periods when a negative bank/cash balance can be expected
- Can be used to secure loans from the bank or venture capitalists
- Help avoid liquidity problems
- Used to help the business set budgets for each department
Cash Flow Forecast Limitations
- Unexpected changes in economy
- Poor market research
- Demotivated employees, productivity is reduced
- Competitors may change their strategies often resulting in this negatively affecting cash flow
Dealing with cash flow problems
Reducing cash outflow
Improving cash inflows
Looking for additional finance
Investment
- Investing means spending money on an asset with the expectation of future earnings. Known as capital expenditure
- Involves wealth creation, including the idea that the assets should appreciate in value over time
- Investment comes with risk due to unexpected changes in market conditions within an economy
Relationship between investment, profit and cash flow
Business stage Investment:
- Startup: Involves high investment due to the purchase of initial assets or startup costs
- Growing: Investment could be high as the business is not yet established
- Thriving: Invesment may be minimal as retained profits can be used
Business stage Profit:
- Startup: There are no profits as costs are not yet met
- Growing: Small profit as revenue starts to be generated to cover costs
- Thriving: High profit is achieved
Business stage Cash Flow:
- Startup: Cash flow is negative
- Growing: Cash flow may be positive but low until sales revenue increases
- Thriving: Cash flow is positive
