Cash – Sources and Uses

Cash is the life and blood of business, any point in business if it fails to flow properly a ‘clot’ occurs that can damage the business and, if not addressed in time, can prove fatal.

For a healthy business, good cash management is essential in a business. Below diagram explains the importance of cash in business.


Shareholders’ funds

The largest proportion of long-term finance is usually provided by shareholders and is termed shareholders’ funds or equity capital. By purchasing a portion of, or shares in, a company, almost anyone can become a shareholder with some degree of control over a company.

Ordinary share capital is the main source of new money from shareholders. They are entitled both to participate in the business through voting in general meetings and to receive dividends out of profits. As owners of the business, the ordinary shareholders bear the greatest risk, but enjoy the main fruits of success in the form of dividends and share price growth.

Retained profits

For an established business, the majority of equity funds will normally be internally generated from successful trading. Any profits remaining after deducting operating costs, interest payments, taxation and dividends are reinvested in the business (i.e. ploughed back) and regarded as part of the equity capital. As the business reinvests its cash surpluses, it grows and creates value for its owners. The purpose of the business is to do just that – create value for the owners.

Loan capital

Money lent to a business by third parties is termed debt finance or loan capital. Most companies borrow money on a long-term basis by issuing loan stocks (or corporate bonds). The terms of the loan will specify the amount of the loan, rate of interest and date of payment, redemption date, and method of repayment. Loan stock carries a lower risk to the investor than equity capital and, hence, offers a lower return.

The finance manager will monitor the long-term financial structure by examining the relationship between loan capital, where interest and loan repayments are contractually obligatory, and ordinary share capital, where dividend payment is at the discretion of directors. This relationship is termed gearing (known in the USA as leverage).


Governments and the European Union (EU) provide various financial incentives and grants to the business community. A major cash outflow for successful businesses will be taxation.

We now turn from longer-term sources of cash to the more regular cash flows from business operations as shown in Figure 1.2. Cash flows from operations comprise cash collected from customers less payments to suppliers for goods and services received employees for wages and other benefits, and other operating expenses. The other major cash flow is long-term expenditure on capital investment.



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