ANNOUNCEMENT: As of August 2024, Project Lethe is no longer updating this site. Feel free to continue to use it! Thank you, from the Lethe Admin Team!

3.7 Cash Flow

"This is one of, if not the most important, things that businesses need to know. Not understanding this, is one of the primary reasons that a business fails - Profit has nothing to do with cash flow"

- Mr E. Owen (circa 2018)

Working Capital Cycle:

1. Cash is on hand

2. Pay for raw materials

3. Pay manufacturing costs (i.e. wages)

4. Get cash from people buying your products

Types of Working Capital Cycles:

Example: Fruit Vendor
- Approximately 24 hour turnover
- Little need to have finance for working capital
Example: Ship Manufacturer
- VERY LOOOONG turnover
- Big need for finance for working capital

Benefits of good working capital:

- Goodwill with investors, customers, shareholders, etc
- Less reliance on borrowing (and therefore less interest)
- Easier ability to deal with opportunities and crisis

Notes:

- The money it has on hand for day to day business (cash)
- If the cash gotten from revenues exceeds your costs, you get positive cashflow
- Cashflow forecasting allows companies to predict when they're business may have negative cashflow
  - This allows them to possibly ask for trade
- What is Working Capital = The funds available for day-to-day operations of an organisation
  - Working Capital = Current Assets - Current Liability
    - Current Assets = Anything the business owns for less than a year
    - Current Liability = Anything the business owes in less than a year

Cash

The money/capital the business has
Calculated by

Cash Balance = Total Cash Inflows vs Total Cash Outflows

Profit

The surplus of money received after selling a product
Calculated by

Profits = Revenue - Total Cost

Example: Cafe Lucchini

Page updated

Google Sites

Report abuse