Quick tip: Do not mix up CASH FLOW with PROFIT/LOSS. This is a key element of your understanding and you will always be tested on your ability to know the difference.
A CASH INFLOW is money that comes in a business in the form of REVENUE, LOAN, CAPITAL. A cash inflow may also include payments from debtors. Cash is needed to allow a business to pay its EXPENSES.
A CASH OUTFLOW is money that flows out of a business as a form of EXPENDITURE. This may be wages, salaries, rent on premises, marketing, paying for leases or pay back a loan.
A business needs to manage its cash inflows and outflows so that it can pay all of its bills.
Businesses normally produce a cash flow forecast to assess the position of their cash flow position. They also produce cash flows in order to support a business plan. A cash flow is produced to cover a certain period of time from a few months to an entire year. The key terminology that you will need to understand is below:
A cash flow forecast will include:
Cash inflows (receipts)
Cash outflows (payments)
Net cash flow (inflows minus outflows)
Opening balance (this is the same as the closing balance of the previous period)
Closing balance (opening balance combined with net cash flow)
Make sure you review your own notes on cash flow.