Cash flow and debt management

Cash flow is the term that refers to the amount of cash being received and spent by a business during a defined period of time. Whilst a thorough knowledge of a business’s profitability is vital, it is even more important to know the state of the business cashflow i.e. where the money is, where it is coming from and where it is going to.

A business needs to know how much money it will need as working capital to cover the gaps between its income and outgoings. This gap is usually the relationship between debtors and creditors. Forecasting a business’s cash needs is essential and is best done using a cashflow forecast.

A cash flow forecast sets out, usually on a month by month basis and over a 12 month period, the receipts and payments of a business. By forecasting what is going to happen with its cashflow a business can identify any potential shortfalls and thereby see what its borrowing requirements are likely to be.