Importance of cash flow to the business

• It is important for a business to manage its cash flow carefully
• As pointed out in the introduction there is a difference between cash flow and profitability
• It is quite possible for a business to be profitable and still have cash flow problems
• Cash is the primary means by which a business settles its obligations as and when they fall due
• Without sufficient cash a business will struggle to pay its creditors
• In extreme cases this may force the creditors to file a court order which might see the owing business being liquidated
• This essentially means the business will cease to exist
• One of the key objectives of businesses is to survive and continue to operate for the foreseeable future
• This means a business might have to sacrifice an increase in profits and focus on cash flow
• This would result in decisions such as:
  1. Offering cash discounts to encourage prompt payment
  2. Asking for and accepting deposits on credit sales
  3. Delaying the payment of creditors and pressuring debtors to pay early
  4. Avoiding over-trading
  5. Negotiating credit lines with banks and other financial institutions
  6. Sale of fixed assets
  7. Rights issue and capital infusion
  8. Delaying the payment of dividends
  9. Reducing the size of inventories (stock)
• Cash flow ensures a business stays liquid and solvent

To access more topics go to the O Level Business Notes