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A LevelBusinessAQARevision Notes5. Financial Management5.2 Financial PerformanceAnalysing Timings of Cash Flow

Analysing Timings of Cash Flow (AQA A Level Business): Revision Note

Exam code: 7132

Steve Vorster

Written by: Steve Vorster

Reviewed by: Lisa Eades

Updated on

Analysing cash flow forecasts

  • A cash flow forecast predicts how much money will come in and out of the business over a period of time. It helps identify times of cash surplus or shortage so managers can plan accordingly

Cash flow table with monthly inflows and outflows from January to June, including sales, capital, expenses, net cash flow, and balances.
Cash flow forecast

Key measures in a forecast

  • Net Cash Flow

    • The difference between total inflows and outflows in a period.

    • Positive: Business brings in more cash than it spends

    • Negative: Cash is leaving faster than it arrives — not always a crisis, but needs watching

  • Closing Balance

    • The cash remaining at the end of the month (Opening Balance + Net Cash Flow)

    • A negative closing balance means the business has run out of cash — urgent action is needed

    • A growing, positive closing balance gives flexibility to invest in equipment or savings

    • A falling or negative balance means cash flow problems are building up

Receivables and payables

Term

Definition

Impact on Cash Flow

Receivables (Debtors)

  • Time customers take to pay

  • Longer terms delay inflows; shorter terms speed them up

Payables (Creditors)

  • Time a business takes to pay suppliers

  • Longer terms delay outflows; shorter terms speed them up

Spotting cash flow problems

Sign

Why it’s a problem

Possible solutions

Falling closing balance

  • Business risks running out of cash

  • Cut non-essential costs, delay projects, arrange overdraft

One large outflow

  • A major payment can drain cash in an otherwise healthy year

  • Pay in installments, lease assets

Late customer payments

  • Creates gaps between selling and receiving cash

  • Tighten credit terms, send reminders, offer early payment discounts

Early supplier payments

  • Money leaves before sales generate cash

  • Negotiate longer payment terms or buy in bulk

Strategies to Improve Cash Flow

  • The cash flow forecast example above identifies a cash flow problem in April and May where the closing balance is negative

  • A business has a range of ways to solve this issue to prevent insolvency

    • The most suitable method may be to arrange a flexible, short-term overdraft facility with its bank

Ways to solve cash flow problems

Method

Explanation

Reduce the credit period offered to customers

  • Collecting money owed from customers more quickly will increase the level of current assets in the business

    • However, customers may move to competing businesses that offer better credit terms

Ask suppliers for an extended repayment period e.g an extension from 60 to 90 days

  • Current liabilities will not be reduced

  • The business can use cash it would have paid to suppliers for other purposes

  • Suppliers may be unwilling to extend credit terms

Make use of Overdraft facilities or short-term loans

  • Current liabilities will increase

  • The business can spend more money than it has in its bank account

  • Banks may be reluctant to lend to businesses with cash-flow problems

Sell off excess stock

  • Less liquid current assets will be reduced and converted into more liquid forms of current asset (e.g. cash)

  • Storage and security costs may also be reduced

  • Stock may need to be sold at a low price to attract sales

Sell assets and lease fixed assets instead (e.g. sale & leaseback

  • Both current assets and current liabilities will increase

  • The business will continue to have the use of assets but must make regular payments to the leasing company

Introduce new capital and reduce drawings from the business

  • Current assets will be increased

  • New capital may be introduced by the owner or from additional investors

  • This may result in the dilution of control of the business

  • A business can also have too much cash

    • If it holds large amounts of cash, it may miss out on the benefits of investing it in fixed assets or savings

    • This may represent a significant opportunity cost especially when interest rates are high

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Lisa Eades

    Reviewer: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.