Key term | Definition |
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 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. |
Cash flow problems | These are liquidity issues that arise when an organization has insufficient funds to run its business, i.e., when net cash flow is negative. |
Cash inflow | Refers to the money coming into a business from earnings (sales revenue) and other sources of finance, such as crowdfunding. |
Cash outflow | Refers to the money going out of a business to pay for its costs, such as the purchase of raw materials or the payment of wages and salaries. |
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). |
Collateral | Refers to the financial guarantee, using a firm’s fixed assets, for the purpose of securing loan capital. |
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. |
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. |
Fixed assets | Also known as non-current assets, these are items owned by a business that hold a monetary value and are used over and over again for production purposes. |
Liquidity | This refers to the extent to which an organization is able to convert its assets (items of monetary value owned by the business) into cash. |
Liquidity crisis | A situation that arises when a business is unable to pay its short-term debts. This can eventually lead to bankruptcy. |
Liquidity position | This is a measure of the extent to which a business has sufficient liquidity to continue its operations and activities. |
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 | Also referred to as net current assets, this refers to the duration between a business paying for its production costs of a good or service and receiving the cash from customers purchasing the product. |
IB Docs (2) Team
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