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Cash flow managementCash flow management


Cash flow is...

An organization’s cash inflows and outflows from its three main activities -operating (or trading), investing and financing:


  Activity   Main cash inflows  Main cash outflows
 Operating  Sales revenue  Operating expenses (e.g. wages and supplies). Tax and interest paid.
 Investing  Sale of fixed assets, subsidiary companies and financial investments. Interest and dividends received.  Purchases of fixed assets, subsidiary companies and financial investments.
 Financing  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 were:


 Net cash (i.e. inflows less outflows) from operating activities  3,185
 Net cash used (or spent) in investing activities  (2,854)
 Net cash from financing activities  56
 Net increase in cash  387

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 year).

The Working Capital Cycle

The working capital cycle shows how working capital (including cash) circulates around a business.

This cycle will look like:

 Cash flow management


Problems of a cash shortage


1. Credit

Difficulty of obtaining credit from suppliers because of the bad feeling caused by delayed payment.


2. Discounts

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.


4. ProfitsCash flow management

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.


6. Liquidation

Possibility of going out of business.


How to avoid a cash shortage


1. Raise money – from:Cash flow management

  • owners (e.g. selling shares).
  • loans
  • reinvested profits.



2. Delay payment for purchases 

e.g. credit purchases, hire purchase and leasing (renting equipment).



3. Selling fixed assets 

You can lease them back under a scheme called sale and lease back.



4. Factoring 

A finance company buys the debts of your credit customers (or debtors) and becomes responsible for collecting them.



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.



8. Check liquidity ratios (see analysing accounts):

  • current ratio: current assets ÷ current liabilities.
  • liquid (or quick, or acid test) ratio: (current assets less stocks) ÷ current liabilities.



9. Use a cash flow forecast (sometimes called a cash budget)

This shows an organization’s monthly planned cash incomes and expenditures for a period of time (usually a year). It will show any future cash shortages, so that any appropriate action can be taken.



Key quotes explained

 Cash flow management

“Customer satisfaction, employee satisfaction and cash flow”,

- Jack Welch (General Electric’s ex-boss, pictured right) on the three most important measures of company performance.

Notice Welch doesn’t mention profit, because it is automatically created by customer and employee satisfaction.


 Cash flow management

“Cash before conscience!”,

- Horace (Roman poet, pictured right).

Principles may be lost in the dash for cash.


 Cash flow management

“The cheque is in the post”,

- Richard Branson, pictured right (his favourite phrase in the cash strapped early years of his company, Virgin).


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