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Content, order and logic of this chapter

Within this chapter we will cover the following topics:

- Where cash appears in financial statements

- Cash flows for trading - working capital

- Insolvency - going concern - overtrading

- Capital cash flows

- Statement of cash flows

- Cash-flow-focused strategies

Order and logic

At a balance sheet date, 'cash' covers instantly accessible bank balances. Cash and bank is the common term used in a balance sheet and is the one asset that will change in amount in seconds as business transactions are carried out, so it must be tracked. Specific and detailed aspects of cash use, reporting and management are to be found in the working capital cycle (considered also in Chapter 7 from an efficiency perspective). If working capital is not properly managed or untoward events bear down on the business, insolvency and bankruptcy may well be the result. This may not just be the result of poor trading, but also of too rapid growth. Understanding and being able to forecast cash flows is necessary if executives are to comply honestly with the concept of going concern and not go bust. Cash can be raised from borrowing or expended on new assets, and these are termed capital cash flows. Executives need to know where cash appears and how it moves, therefore the statement of cash flow aims to give the 'big picture' view of cash flows within a business; it is important to understand your business model from a cash perspective. A vision or objective could be to resolutely make money, to generate cash from trading or disposal of assets. It may not be considered necessary to express this objective as making a return on investment, it could be simply making or possibly releasing cash, and there will be different strategies to achieve this. The chapter concludes by looking at cash-focused strategies.

 
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