120 cash flow

Question 1

explain what is meant by cash flow

Answer 1

‘cash’ is the amount of money that the business has on a day-to-day basis
in- when sales are made, a loan is received from the bank
out- payments are made eg . to supplier or when other overheads are paid

Question 2

explain what is meant by a cash flow forecast

Answer 2

a statement that shows the expected flows of cash in and out of a business over a specific period of time eg.6 months or a year. It predicts his much cash is , or will be available in a business, or his much cash will be needed to keep the business running

Question 3

cash flow forecast equations

Answer 3

nest cash flow = total revenue- total expenses
opening balance = closing balance from previous month
closing balance = net cash flow + opening balance

Question 4

(+) of having positive cash flow

Answer 4

• business stays solvent- its able to pay its day-to-day debts
  -business looks attractive to banks and potential investors
  -business may discover it has surplus cash (spare cash) ready to be invested into growth- generating more revenue and profit

Question 5

(-) drawbacks of having a negative cash flow

Answer 5

-suppliers may not want to supply them
-risk of debt and closure- unable to pay wages , rent , adverting ext
-little chance to grow

Question 6

causes of cash flow problems

Answer 6

sales not at expected level -increased competition, customers tastes changing
costs increase - increased labour , raw materials , inflation
internal factors - poor budgeting and lack of control of spending , poor initial predictions of income and expenditure

Question 7

how does increasing price of a product improve cash flow

Answer 7

-increasing price could increase cash flow , more inflow -> (A04) however this depends in competition, if prices are changed too high, customers would go to the cheaper option , so business would make less sales (elasticity of demand)

Question 8

how does going to a cheaper supplier improve cash flow

Answer 8

-increases cash flow reduces outflow -> (A04) however it depends because by going to a cheaper supplier, it could lead to worse quality products, customers won’t be satisfied , less sales

Question 9

how does taking a loan improve cash flow

Answer 9

-benefits more cash inflow -> (A04) however it depends on how profitable the business is , and if cash flow is predicted as good , also depends on how much borrowed-interest

Question 10

how does extended trade credit period improve cash flow

Answer 10

-by negotiating to extend the to,e to lay suppliers back , the business can hold on to cash for longer and use that to meet deadlines and other obligations before needing to pay back suppliers -> (A04) however it depends on the ability to negotiate with suppliers and weather they will accept the notion that they will have to wait longer to get paid

Question 11

(+) benefits of preparing a cash flow forecast

Answer 11

-an accurate cash flow forecast allows business to get a clear idea on how it is preforming , and how likely it is to preform in the future
-allows managers to be able to specify times when the business may need additional funding
-when there is predicted to be a large positive cash flow , the business can plan ahead on how to use this money by investing or paying off debts

Question 12

(-) limitations of using a cash flow for case

Answer 12

-drawing up cash flow statements takes up management time- could be used doing other tasks
-they need to be accurate to have value -difficult to achieve if business has little to no trading history to base predicted cash flow in on
-inflation affects accuracy of figures