Business Finance

How can we define cash?

Example £10

Ex: £10 note can be used to buy goods to the value of that currency. Therefore, by producing the £10 note it can be instantly used to purchase goods.

Therefore, Cash can be described as the most liquid of assets, as:

- Cash is cash, and it need not be converted to cash.

- It can be deposited in a bank account for safe keeping, ex: Extra Cash.

- Lack (shortage) of cash inflows (cash received by a business), will cause cash shortages and may cause business failure.

Ex: Cash received by a business - 1,275,980

Cash paid by a business - 2,550,000

Cash Shortage is = 1,275,980 2,550,000 = (1,274,020)

As a result, continuous cash shortages will result in BUSINESS FAILURE

Importance of Cash

Transaction

Reason

Pay suppliers

Since suppliers provide the raw materials and resources needed for production, they should be PAID ON TIME.

Settle bills (overheads)

Rent, electricity, heat and water bills should settled on time, as otherwise they may not be provided

Pay employees

Timely payment of salaries, will make the employees satisfied

To prevent business failure

A business should not run out of cash. Therefore it is important they maintain a proper cash flows. A business may fail and become insolvent if they run out of cash

Cash flow cycle: (only for knowledge)

Stage 1 Purchase goods for resale on credit

Stage 2 - Sell the goods on credit to customers, and some customers pay by cash

Stage 3 - Receive cash from customers who bought on credit

Stage 4 - Pay the suppliers, who provided goods on credit