Cash flow is the movement of money into and out of an organisation over a period of time, planned using a cash budget. The Junior Cycle exam assesses your ability to complete multi-month cash budgets, evaluate financial performance using figures, and propose appropriate sources of finance.
Why Plan Cash Flow?
Cash flow is money actually moving in and out of the bank; profit is revenue earned minus expenses, so a profitable business can still run out of cash. A business can be making a profit and still close down if its cash is tied up in unsold stock, or in customers who have not yet paid, when bills fall due.
Preparing a cash budget helps an organisation to:
- Predict cash shortages before they happen so corrective action can be taken.
- Make sure enough funds are on hand to pay essential expenses like wages and rent on time.
- Schedule major asset purchases without draining the bank account.
Structure of a Cash Budget
In the exam, each receipt and payment has its own printed row (such as Cash sales, Capital, Grant, Purchases, Wages, and Rent). You add down each column and complete five main lines:
- Total Receipts: All expected cash inflows, including cash sales, money from debtors, capital invested by owners or shareholders, grants, and loans received.
- Total Payments: All planned cash spending, such as cash purchases, wages, rent, insurance, light and heat, new equipment, and loan repayments.
- Net Cash: Total Receipts minus Total Payments. A negative result is shown in brackets, e.g. (€1,200), or with a minus sign, e.g. −€1,200. Both are accepted.
- Opening Cash: Money in the bank at the start of the month. This is always the previous month's Closing Cash.
- Closing Cash: Net Cash plus Opening Cash.
A household budget uses Income and Expenditure instead of Receipts and Payments, but the Net Cash, Opening Cash, and Closing Cash lines work in exactly the same way.
In the Total column, sum the receipts, payments, and net cash across the rows. In the Total column, Opening Cash is just the first month's opening cash, and Closing Cash is the last month's closing cash.
Interpreting Surpluses and Deficits
A completed cash budget reveals the upcoming financial position for each month:
- Cash Surplus: Receipts are greater than payments, leaving extra cash. The business can place surplus funds into an interest-bearing deposit account or clear existing loans early.
- Cash Deficit: Payments exceed receipts, creating an expected shortfall shown in brackets, e.g. (€900).
To resolve a temporary deficit without borrowing, a firm can:
- Speed up cash inflows: Offer cash discounts to credit customers for early payment or insist on cash-on-delivery.
- Cut or delay outflows: Postpone non-essential spending or delay purchasing new machinery.
- Negotiate credit terms: Agree longer payment periods with suppliers to keep cash in the business longer.
Matching Sources of Finance to Expenditure
Organisations must match the duration of the finance to the lifespan of the item:
| Term | Source | Suitable Expenditure |
|---|---|---|
| Short-Term (under 1 year) | Bank overdraft, Trade credit | Temporary cash shortages, routine stock purchases |
| Medium-Term (1–5 years) | Term loan, Hire purchase, Leasing | Equipment, machinery, delivery vehicles |
| Long-Term (over 5 years) | Owner's capital, Retained profit, Mortgage | Buying premises, major long-term expansion |
For example, paying cash for expensive equipment drains bank reserves. Spreading the cost over three years using hire purchase removes large monthly deficits.
Key terms
- Cash Flow
- The movement of money into and out of an organisation over a specific period.
- Cash Budget
- A financial forecast of expected cash receipts and cash payments over an upcoming period.
- Net Cash
- The difference between total receipts and total payments for a specific period.
- Opening Cash
- The amount of cash on hand in the bank at the start of a trading month.
- Closing Cash
- The bank balance remaining at the end of a month, calculated as Net Cash plus Opening Cash.
- Cash Deficit
- A financial shortage occurring when total cash payments exceed total cash receipts over a period.
- Cash Surplus
- An excess of cash that occurs when total cash receipts exceed total cash payments over a period.
- Bank Overdraft
- A short-term loan from a bank that lets a business take more money out of its current account than it has in it, up to an agreed limit.
Check yourself
What is the formula used to calculate Net Cash in a cash budget?
Total Receipts minus Total Payments.
Where does a business find its Opening Cash figure for the month of April?
It is the Closing Cash balance from the end of March.
A customer buys goods on credit in September and pays in October. In which month is the receipt recorded?
October, because cash is recorded only when money is actually received.
Name one suitable source of finance for purchasing a delivery van.
A medium-term loan, hire purchase, or leasing.
A shareholder invests €50,000 in the business in May. Where does this appear in the cash budget?
As a receipt in May, under Capital or Share Capital.