An organization’s cash inflows and outflows from its three main activities -operating (or
trading), investing and financing:
Main cash inflows
Main cash outflows
Operating expenses (e.g. wages and supplies). Tax and interest paid.
Sale of fixed assets, subsidiary companies and financial investments. Interest
and dividends received.
Purchases of fixed assets, subsidiary companies and financial
Share sales and new loans
Dividends paid and loan repayments
These inflows and outflows are all included in an organization’s cash flow statement that all companies must
publish (see financial accounting). For the year ended 22
February 2014 the key items in the British supermarket Tesco’s cash flow statement
Net cash (i.e. inflows less outflows) from operating activities
Net cash used (or spent) in investing activities
Net cash from financing activities
Net increase in cash
Cash shortages arise from...
Insufficient working capital i.e. current assets (cash or easily convertible into cash) less current liabilities
(unpaid debts). This results from over-investment in fixed assets (like property and equipment kept for over a
The Working Capital Cycle
The working capital cycle shows how working capital (including cash) circulates around a business.
This cycle will look like:
Problems of a cash shortage
Difficulty of obtaining credit from suppliers because of the bad feeling caused by delayed payment.
Inability to take advantage of cash discounts.
3. Financial reputation
Damage to a firm’s standing in the eyes of potential investors and lenders which will make it more difficult to
raise future finance.
Inability to pay for supplies and profitable investment opportunities like new products.
5. Borrowing and asset sales
Possible necessity of having to borrow or sell assets.
Possibility of going out of business.
How to avoid a cash shortage
owners (e.g. selling shares).
payment for purchases
e.g. credit purchases, hire purchase and leasing (renting equipment).
You can lease them back under a scheme called sale and lease back.
A finance company buys the debts of your credit customers (or debtors) and becomes responsible for collecting
5. Stock control
Making sure you have enough stocks (e.g. raw materials and goods to sell) without having too many.
Just-In-Time minimizes stocks by getting them delivered only when they’re needed.
6. Credit control– making sure your credit customers pay up.
7. Creditor control– delaying payment to suppliers for as long as possible.