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Level 2 Business and Economics: Cash Flow

Introduction

Cash flow is one of the most important aspects of running any business - large or small. It is one of the single most important reasons why many businesses fail - regardless of how good the business is. Managing cash flow therefore is vitally important in the smooth running, survival and success of a business.

This activity will look at what cash flow is, and use some examples to show how cash flow can make the difference between success and failure. Failure in this case means insolvency. If you are insolvent then you are unable to pay your debts. We often use the term 'bankrupt' to describe this but strictly, only an individual can be declared bankrupt. Companies are declared as insolvent. The principle however is the same. Some firms deal with so-called 'personal insolvency' which effectively means bankruptcy so the use of the terms can sometimes be confusing!

Business success might not be determined by how many customers you have, the quality of your product, the price or many other things - it might be down to a simple case of managing your cash flows! Copyright: Damien Moorhouse, from stock.xhcng.

To help work through the ideas behind cash flow, we are going to use the scenario of the fruit stall that was introduced in a previous resource. (http://www.bized.co.uk/educators/level2/finance/lesson/busaccounting1.htm) This presented a very simplified case on which to look at some basic accounting principles and we can use this to help us understand the principles of cash flow.

Pages in the Series

• What Is Cash Flow?
• Cash Flow Forecasts
• Actual Cash Flow
• What Does the Cash Flow Forecast and Document Tell Us?
• Final Task