A LEVEL BUSINESS TOPIC GUIDE
CASH FLOW
Cash flow is the movement of money into and out of a business. It is important for ensuring a business can meet its short-term financial obligations.
Covers: AQA | Edexcel | WJEC | CAIE
1. TOPIC OVERVIEW
Cash flow is the movement of money into and out of a business over time. It is important because a business may be profitable but still fail if it lacks the liquidity to pay short-term costs such as wages, suppliers and loan repayments.
Strong cash flow improves financial stability, while poor cash flow can increase reliance on overdrafts or lead to insolvency.
2. ITS IMPORTANCE TO A BUSINESS
Cash inflows may come from sales revenue, loans, owner investment or asset sales, while cash outflows include payments for stock, wages, rent, utilities and finance costs.
Cash is needed to keep the business operating on a day-to-day basis. If outflows occur before inflows are received, the business may face pressure even when sales are strong.
Effective cash flow management helps a firm plan ahead, maintain supplier relationships and avoid unnecessary borrowing.
3. FORMULA / PROCESS
Opening Balance + Cash Inflows - Cash Outflows = Closing Balance
