ABSTRACT
Initially, we will highlight the distinction between cash flow and profit. A clear understanding of this distinction is important. The immediate cause of bankruptcy is not a business’s failure to make profit. Bankruptcy occurs when a firm does not have enough cash to honour liabilities that are due for payment. We will highlight this distinction between cash flow and profit by working through the mechanics of preparing a cash budget. The cash budget is particularly important, as it predicts the timing of cash surpluses and deficits. Knowing when there will be a cash surplus allows investment plans to be formulated. Knowing the timing of a projected cash deficit allows short-term borrowing arrangements to be made in advance of the cash shortfall occurring. Failure to predict the timing of cash shortfalls can result in costly borrowing arrangements or, much worse, bankruptcy.
