3.7 Cash flow
What we will study?
By the end of this unit you should be able to:
- Explain the relationship between investment, profit and cash flow
- Define working capital and explain the working capital cycle
- Prepare a cash flow forecast from given information
- Evaluate strategies for dealing with liquidity problems
What is cash flow?
What is working capital?
Working capital = current assets - current liabilities.
Liquidity - definition: The ability of a firm to be able to pay its short-term debts.
Insolvent - definition: When a business cannot meet its short-term debts.
All businesses need finance to pay for everyday expenses such as wages and the purchase of stock. Without sufficient working capital a business will be illiquid - unable to pay its immediate or short term debts. Either the business raises finance quickly, such as a bank loan, or it may be forced into liquidation by its creditors, the firms it owes money to.