### ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Cash Flow Introduction

• Cash flow is defined as the movement of cash into and out of the business
• Cash flowing into the business is called cash inflow
• Conversely cash flowing out is called cash out flow
• In accounting terms cash flow is viewed as the difference between the amount of cash at the end of the year versus the amount of cash we had at the beginning
• If the amount of cash outflows exceed the amount of inflows in a given period this is known as negative cash flow or deficit
• On the other hand if the amount of cash inflows exceed the amount of outflows in a given period this is known as positive cashflow or surplus
• In finance and accounting terms cash is defined as ready money
• includes money in hand, petty cash, bank account balance, customer checks, and marketable securities
• The later are known as cash equivalent
• Cash is the primary means by which a business meets it’s financial obligations
• A business that has ample surplus cash flow is said to be liquid
• A business that has a deficit is said to be illiquid

#### Differences between profit and cash flow

• Profit is the difference between revenue obtained from operations and the expenses incurred in generating that revenue
• Cash flow meanwhile is the net difference between cash inflows and cash outflows in a given period
• Profit is shown in the Income statement/Statement of comprehensive income which was formerly known as the Trading and Profit and Loss Account
• On the other hand Cash Flow is shown in the Cash Flow statement
• Profit is calculated using what is known as the matching concept or the accrual basis while cash flows are calculated on a cash basis
• Consider the following example:
• John starts his business with \$5000 which he uses to purchase goods worth \$4 000 and sells for \$5 000 on credit
• Assuming no other transactions take place in John’s business
• His profit will be \$5 000 – \$ 4 000 = \$1 000
• His cash flow would be: \$5 000-\$ 4 000= \$1 000
• It must be noted that the above is a very simple case
• Consider a more nuanced example where John starts with \$5 000, makes purchases worth \$5 000, sells the goods for \$7 000 credit and receives \$500 in cash from his debtors
• His profit would be \$7 000-\$5 000 = \$2 000
• His cash flow would be \$5 000 (start up amount) – \$5 000 (expended towards purchases)+ \$200 (received from creditors)= \$500
• As you can see the figures are clearly different
• It is therefore possible for a business to be profitable but still have liquidity problems