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Cash is the most liquid of all the assets of a business it represents the bank balance and the cash
that the business has available on the premises (otherwise known as 'petty cash').
Cash flow refers to the difference between the cash flowing into the business (e.g. through sales
revenue) and the cash flowing out of the business (e.g. bills and wages).
Having a positive cash flow is vital for the survival of a business, since without the ability to pay
workers and suppliers then the business will soon have to cease trading.
This potential problem is compounded by the fact that businesses often have to pay many expenses
several weeks or even months before any cash actually flows into the business.
For example, wages and salaries will have to be paid to employees, suppliers will have to be paid
for any raw materials, and the rent or mortgage payments will have to be paid before the products
can be manufactured and sold to customers.
Further to this point, if the products are sold on credit to customers, then the time delay between the
cash outflows and the cash inflows will be even longer.
The major causes of cash flow crises for a business are:
1. Overtrading where the business attempts to expand too rapidly, without a sufficient
2. Having too much money invested in stocks.
3. Allowing too much credit to their customers.
4. Unexpected changes in demand for their products.
5. Overborrowing therefore having large monthly loan repayments, which have to be met.
There are many actions that a business can take when it is experiencing a liquidity crisis:
1. Offering price discounts to boost sales and sales revenue.
2. Selling off fixed assets.
3. A 'sale and lease back' arrangement.
4. Chasing debtors for the monies owed to the business.
5. Selling off stocks.
Whatever action is decided upon, the business must ensure that it is implemented quickly and that a
careful eye is kept on the liquidity (cash flow) position in the future.
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A cash flow statement is a Financial Accounting document, which shows the cash inflows and
the cash outflows for a business over the past 12 months.
It indicates those months in which the business suffered a cash flow crisis (where cash outflows were
greater than cash inflows) and it will also highlight those months in which the business was cashrich
(i.e. more cash inflows than cash outflows).…read more