Understanding Cashflow

Understanding Cashflow

Within an organisation, money comes in and flows out. This is called

the organisation's cashflow.

From time to time, business managers may pose questions such as:

* 'Can we afford to buy x?'

* 'Are we going to be able to pay that bill?'

* 'Wouldn't it be nice if we could develop y?'

To answer such questions, they will often have to carry out some form

of financial planning, and often to seek additional finance from

outside the company. The key issues are:

* What is the finance for?

* How long will it be needed?

* Is it affordable, i.e. can the firm keep up with the repayments?

Common methods of finance

Sources of finance fall into two main categories. Short-term finance

is designed to be paid back quickly, while long-term loans may be paid

over many years.

Short Term

Long Term

Trade credit

Mortgages

Factoring

Profit retention

Leasing and hire purchase

Venture capital

Loans

Equity

Trade credit

This is a useful source of finance provided by suppliers. With trade

credit, a business can use the goods or service provided by suppliers

before they are paid for.

The credit period is simply the period between receiving a good or

service and paying for it. Although no charge or rate of interest is

attached to trade credit, cash discounts may be lost if payments are

not made within the agreed time.

Overdraft

An overdraft is probably the most frequently used solution to cashflow

problems. The bank sets an agreed limit on the customer's bank

account, beyond which they will not draw. This is called an overdraf...

... middle of paper ...

...return for shareholding in the

business. 3i us the largest venture capital company of this type.

Equity

This means finance provided by the owners of the business. How easily

equity can be raised will depend upon the type of business. For

example, a sole trader may rely on personal sources, and extra sums of

money may difficult to raise. Sole traders may even take in partners

to inject some capital into the business.

A private limited company has certain restrictions on the rights of

members to transfer shares, and there are limits on their ability to

extend share ownership.

A fully listed public limited company may have many different

opportunities to raise fresh capital from the financial markets.

However, the problem with issuing more shares is that it dilutes the

control of the original shareholders.