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What is Cash flow?

Cash flow refers to the money which comes into and goes out of a business over a period of time. In other words it is the cash inflow and cash outflow out of a business.

Cash inflow

Cash inflow means all the sources from which cash comes into the business over a period of time.

Cash inflow can result from

  • Cash sales
  • Payment received from debtors
  • Investment by owner
  • Loans and overdrafts

Cash outflow

Cash outflow means all the sources from which cash goes out of the business over a period of time.

Cash outflow can result from

  • Cash purchases
  • Payment of wages and salaries to staff
  • Purchase of fixed assets
  • Payments to Creditors
  • Repaying loans
  • Miscellaneous expenses.

Cash flow forecasts

Cash flow forecast is a budget or estimate which identifies the anticipated income and expenditure and the time when it is likely to take place, usually on a month by month basis.

Purpose of Cash flow forecast 

The primary purpose of the cash flow budget is to predict the sources and uses of cash and to identify your cash position for a specific time period (daily, weekly, monthly etc.).

Cash flow problems

Sometimes a profitable business might face cash flow problems. It may be due to

  • There might be a sudden fall in sales whereas the expenses may not come down in the same proportion.
  • Any unforeseen expenses may lead to high cash outflow as compared to cash inflow in that particular period.
  • Debtors’ payback period is too long.

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How to solve cash flow problems

Cash flow problems can be solved through

  • Arranging a bank loan or an overdraft.
  • Reducing or delaying some planned expenditure.
  • Improving the forecasted cash income for that particular period of time.
  • Delay payments to creditors.



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