1.3 Cash and Cash flow

Question 1

What does cash mean?

Answer 1

Cash is the amount of money that a business has in its bank account.

Question 2

What does cash flow mean?

Answer 2

A business’s cash flow is the way in which money comes into the business from customers and goes out of the business to pay suppliers.

Question 3

What are the two types of cash flow?

Answer 3

Positive cash flow- more money coming in than going out

Negative cash flow- less money coming in than going out.

Question 4

Explain the importance of cash to a business.

Answer 4

1. A business must have enough money to pay its regular bills and any money that it owes.

Question 5

What can managing cash flow be difficult?

Answer 5

1. Not all customers pay at which they receive the product or service.
2. Customers may be sent an invoice and are expected to pay when they receive the invoice or the customer may have a credit arrangement allowing them to pay for them products with a given period of time.

Question 6

Why must a business has a good relationship with its supplier?

Answer 6

As a supplier is responsible for ensuring that raw materials or products arrive on time and in perfect condition to be used or sold.

Question 7

What must a business also be able to pay. What are the consequences if this is not payed?

Answer 7

1. Overheads- such as rent and maintenance of company vehicles as well as bills for any additional services such as electricity and telephones.
2. Failure to pay these costs regularly and on eitre could lead to the services being withdrawn.

Question 8

What are the three things a business must be able to pay regularly?

Answer 8

1. Paying suppliers
2. Overheads
3. Employees.

Question 9

What can a business do to prevent failure in terms of costs?

Answer 9

1. Arranging sensible credit arrangements with suppliers and customers. A business could agree credit arrangements with its suppliers for a longer term than the term that it offers its customers.
2. Limiting the numbers of customers to which it given credit. A busies should have more customers who pay for their products or services when the receive them than customers who pay later of a credit arrangement.

Question 10

What is a cash flow forecast?

Answer 10

A cash flow forecast is an estimate of how much cash will come into

Question 11

How can a cash flow forecast be used?

Answer 11

They can help a business to know how much cash it expects to take in a year and how much the business is likely to spend.

They also indicate when money is likely to come into and go out of the business’s bank account.

Question 12

What are some of the important decisions a business may make when thinking about cash?

Answer 12

1. Taking on more staff
2. Opening a new branch
3. Identifying any risk that the business could run out of cash and need to borrow money.
4. Taking additional money out of the business to invest into a new business or reward the owner for the success of their business.

Question 13

What are the 5 main areas in a cash flow forecast?

Answer 13

1. Cash inflows
2. Cash outflows
3. Net cash flow
4. Opening balance
5. Closing balance

Question 14

What are cash inflows.

Answer 14

The cash inflows are all of the money that comes into the business.

The business is separated into different areas or categories that receive cash.

The forecast cash inflow is then put against each category for each month.

Question 15

What are cash outflows?

Answer 15

Cash outflows are all of the money that will leave the business in order to pay its fixed and variable costs.

Question 16

What is net cash flow?

Answer 16

The net cash flow is the difference between the cash inflows and the cash outflows.

Question 17

Equation for net cash flow.

Answer 17

Net cash flow= cash inflows- cash outflows in a given period

Question 18

What does opening balance mean?

Answer 18

The opening balance is the amount of money in the business’s bank account at the start of any period.

Question 19

How can net cash flow be used?

Answer 19

The business can use the net cash flow figure each month to look ahead and work out if it will need to borrow money and for how long.

Question 20

What does closing balance mean?

Answer 20

The closing balance is the amount of money in the bank at the end of each month.

Question 21

Equation for closing balance.

Answer 21

Opening balance + net cash flow.

Question 22

What is the difference between turnover and profit?

Answer 22

Turnover measures them before taking out major costs.

Profit is residual earnings after costs.