Bad debt

This occurs when a debtor is unable to pay outstanding invoices to the business. The result is it reduces the cash inflows for the vendor (seller).

Cash

The money a business has, either “in hand” (at its premises) and/or “at bank” (i.e. in its bank account). It is the most liquid of a firm’s current assets and is easily accessible.

Cash flow

The movement of an organization’s cash inflows (cash received from the sale of goods and services) and cash outflows (used to pay for the costs of running the business).

Cash flow

The movement of money in and out of an organization.

Cash flow forecasting

A quantitative technique used to predict how cash is likely to flow into and out of the business for a particular period of time.

Closing balance

Found in a cash flow forecast, this refers to the value of cash held by a business at the end of a trading period (usually on the last trading day of the month).

Credit control

The process of monitoring and management of debtors, such as ensuring only suitable customers are given trade credit and that customers do not exceed the credit period.

Current assets

The short-term assets (belongings) of an organization that can be relatively easy to convert into cash, i.e. cash, stocks (inventory), and debtors.

Current liabilities

The short-term debts of a business, which need to be repaid within twelve months of the balance sheet date, e.g. overdrafts, trade creditors and short-term loans from banks.

Debt factoring

A financial service provided to businesses that are struggling to collect money from their debtors and/face liquidity problems, involving the third party financier taking over the collection of the firm’s outstanding (unpaid but issued) invoices.

Debtors

A category of current assets, these are individuals or businesses that owe money to the organization because they have bought products on trade credit, so typically need to pay within 30 and 60 days.

Liquidity problem

Also known as a cash flow problem, this issue occurs when there is a lack of cash in the organization because its cash inflows are less than its cash outflows, i.e. it experiences negative net cash flow.

Net cash flow

The numerical difference between an organization’s total cash inflows and its total cash outflows, per time period. The formula to calculate this is: Cash inflows – Cash outflows.

Net current assets

Also known as working capital, this is shown on a balance sheet to reveal the liquidity position of a business, this is found by using the formula: Current assets – Current liabilities.

Opening balance

Found in a cash flow forecast, this refers to the value of cash held by a business at the start of a trading period (usually the beginning of the month).

Overdrafts

A financial service from banks that enable customers to temporarily take out more money than is available in their bank account.

Profit

The value of sales revenue after all costs have been accounted for, i.e. the positive difference between a firm’s sales revenue and its total costs of production.

Sales revenue

The value of goods and/or services sold to customers. It is calculated using the formula: Price × Quantity.

Short-term loans

Advances (borrowed funds) from a financial lender, such as a bank, repayable within 12 months.

Stocks

Also known as inventories, these are the goods that a business has available for sale, per time period. They are intended to be sold as quickly as possible, to generate cash for the business.

Tax

Payment made to the government if the business earns profit after all costs and expenses have been paid.

Trade creditors

The suppliers who have yet to be paid, as they offer the business to buy now but pay later, generally within 30 to 60 days from the time of purchase.

Working capital

Also known as net current assets, this refers to the cash or other liquid assets available to an organization for its daily operations, such as paying for raw materials, utility bills and staff wages.

Working capital cycle

The duration between a business paying for its production costs of a good or service and receiving the cash from customers purchasing the product.