Cambridge IGCSE Business Studies 5.2 Cash-flow forecasting and working capital

5.2.1 The importance of cash and of cash-flow forecasting

Cash – is a liquid asset immediately available for the business to use and spend.

Problems for the business if it has too little cash

• Can’t pay employees and suppliers
• Production of goods stops 
• Liquidation (business stops and sells assets to pay debts)

Cash flow – money going into and out of a business over a period of time

Examples of cash inflow include

• Sales of products and services
• Money received from bank loans and sale of assets
• Capital raised from selling shares

Examples of cash outflow 

• Purchasing of stock/inventory
• Buying assets such as buildings, machinery etc..
• Employee wages and salaries

Cash flow cycle 

Cash is needed by the business for operation -> Products are produced -> Products sold -> Customers pay cash to the business -> REPEAT

Cash flow forecast – Estimate of future cash inflows & outflows of the business and shows expected balance at the end of each month.

Why do businesses need cash flow forecasts?

• To startup the business
• To show bank manager to get bank loan approved
• Manage cash flow

Businesses shouldn’t have too much cash in bank account as it could’ve been used in better ways e.g. expanding the business, investing, etc…

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Simple Cash flow forecast

*You may be asked to fill in missing parts of a cash flow forecast in your exam.

Net cash flow = Cash inflow – Cash outflow

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Examples of how businesses can solve short term cash flow problems

• Apply for a bank loan – Businesses can quickly borrow money from the bank, however, interest will have to be paid.
• Delay or cancel plans to purchase new equipment – Delaying or canceling plans to purchase new equipment such as new machines may significantly reduce cash outflow. However, this is bad for the business in the long term as new machines can increase the efficiency of the business.
• Purchasing supplies on credit – This means paying their suppliers at a later date (delays cash outflow). However, some suppliers may not allow this or may only give discounts to customers who don’t buy on credit.
• Only sell in cash, not credit – Businesses can choose to only sell to customers in cash, this means that the business will get their money immediately. However, customers may buy from competitors that sell on credit.

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5.2.2 Working capital

Working capital – Capital (money) available for a business to pay for day to day operations

Working capital = current assets – current liabilities

Businesses need sufficient working capital to 

• Pay employee wages and salaries
• Figure out if they are in a good financial position to purchase supplies that are currently on sale (e.g. Suppliers may give discounts to customers that pay by cash not credit)
• Ensure they have enough cash for day to day operations
• Pay debts