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What is meant by cash flow?

Cash is a liquid asset, meaning that i can be spent on goods and services any time. Many business experience cash flow problems, meaning that they do not have enough cash to do what they want to do. Cash flow means "the flow of money in and out of a business". These are ways cash flow can occur:

Cash inflows: * Sale of goods for cash. * Payment from debtors. * Borrowing from a source (but will inevitably lead to cash outflow in the future). * Sale of unwanted assets. * Investment from investors: shareholders and owners
Cash outflows: * Purchasing goods for cash. * Payment of wages, salaries and others in cash. * Purchasing fixed assets. * Repaying loans. * Repaying creditors.
Cash flow cycle

A cash flow cycle explains the stages that are involved in the process of cash out and finally into the business. This is what happens:

The longer it takes for cash to get back to the business, the more they will needworking capital to pay off their short-term debts. This cycle also helps us understand the importance of cash flow planning. This is what happens when a company is short on cash: * Not enough to pay for materials, therefore sales will fall. * The company will want to insist customers on paying in cash, but they might lose them to competitors who let them pay in credit. * There could be a liquidity crisis when it does not have enough cash to pay for overheads (bills, rent, etc.) and the business might be forced to close down by its creditors.
Managers need to plan their cash flow so that they do not end up in these positions.

Cash flow is not profit!

First we need to examine the formula for cash flow:

Cash flow = Cash inflow - Cash outflow

However, when calculating profit, we also take into account credit that debtors owe us. Therefore, a company might make

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