The importance of cash to a business
Emma and Mo discuss the importance of cash-flow in business
Cash
Cash refers to the physical money a business has in notes and coins, along with any money it has in the bank.
The management of cash is very important as cash allows a business to pay its bills. The main cash payments a business makes include:
- payments to supplierA business that provides goods or services to another business.
- payments to employees
- overheadsThe fixed costs that come from running an office, shop or factory, which are not affected by the number of specific products or services that are sold., such as rent, electricity and telephone bills
When a business has just a few large customers and they fail to pay on time, the business’ cash flowThe movement of money into and out of a business' bank accounts. position is badly affected because the business does not have money it was expecting to have. This can lead to the business having financial difficulties and even failing.
A business can arrange creditThe amount of money that a financial institution or supplier will allow a business to use, which it must pay back in the future at an agreed time. terms with its suppliers, in order to pay for raw materials or stock at a later date. Credit arrangements can also allow customers to pay for products or services within 30, 60 or 90 days. If a business allows its customers credit terms, it is a sensible option to also negotiate longer credit terms with its suppliers.
Profit
profitsThe amount of money made after all costs are deducted. refers to the amount of money left over once all costs have been deducted from all revenueThe income earned by a business over a period of time from selling its goods or services.. It is important to know that not all cash in a business is profit.
Profit is usually calculated on an annualEvery year. basis. However, calculating it monthly can help a business by showing that it is solventThe ability to meet day-to-day expenditure and repay debts. and indicating whether it will be able to achieve its profit targets.
