CASHFLOW

Question 1

What is Cashflow?

Answer 1

It is the money that flows in and out of a business over a given period of time. Cash inflow is the money received by the business and cash outflow is the money paid out by a business over a period of time.

Question 2

What does cashflow indicate?

Answer 2

• Shows a firm’s ability to meet its financial obligations.
• Enables a business to meet its day to day operations.
• Financial stability

Question 3

Profit

Answer 3

Obtained by subtracting the total costs from the total revenue. It is considered profit if the difference is pspotive, and loss if its negative. It is an indicator of the financial success of a firm.

Question 4

Profit and cashflow are different

Answer 4

When buying something, customers can either pay it through cash or credit. Purchasing on credit doesn’t affect the profitability of the business since the sold goods count as sals revenue. However, the cashflow position will be different than profitability. It will be lower, because since it was purchased on credit the money will be received later.

Question 5

Two possibilities can arise in differentiating between profit and cash flow

Answer 5

1. A business can be profitable and have little to no cash because:
   - poor collection of funds, maybe by allowing very long credit periods
   - paying suppliers too early and leaving little money for cash operations
   - purchasing many non-current assets at the same time
   - Servicing loans with cash
2. Can have positive cashflow but be unprofitable
   - Sourcing cash from bank loans
   - Gaining cash from the sale of a firm’s fixed assets
   - Obtaining cash from shareholder’s funds