1.3.3 Cash and Cash-flow

Question 1

Importance of cash to a business:

Answer 1

• to prevent business failure - without cash a business would become insolvent
• to pay suppliers, overheads and employees
• repay bank loans
• buy raw materials and products to sell

Question 2

What is the difference between cash and profit?

Answer 2

• profit is an absolute calculation defines as revenue subtract all the expenses of a company in a certain period
• whereas cash flow is cash that flows in and out to/from a business throughout a certain period of time
• cash is the given amount of money available for a business to pay its debts

Question 3

Cash-flow:

Answer 3

process of cash-flowing in and out of a business ona. day-to-day basis i.e. cash inflows and outflows

Question 4

Net-cash flow:

Answer 4

difference between cash inflows and cash outflows over a trading period

Question 5

Cash in-flow/receipts:

Answer 5

the money going into a business which could be from sales, investments or financing

Question 6

Cash out-flow:

Answer 6

the cash moving out of the business

Question 7

Opening balance:

Answer 7

• the amount of money in a business at the start of the month
• opening balance = closing balance of the previous period

Question 8

Closing balance:

Answer 8

closing balance refers to the bank balance at the end of a day, month, or year

Question 9

What are the negatives of cash-flow forecasting?

Answer 9

• sales prove lower than expected
  
  • easy to be over -optimistic
  • market research may have gaps
• customers don’t pay on time
  
  • notorious problem for small businesses
• cost of production proves higher than expected
  
  • perhaps because purchase prices turn out higher
  • could also be due to business operating inefficiently
• certain costs not included
  
  • common problems for start-up
  • unexpected costs always arise - e.g. start-up costs too high

Question 10

How can a profitable business still fail?

Answer 10

• a profitable business can still fail if it receives cash-flow problems - as revenue is recorded before the business receives actual cash
• similarly, cash does not have to be spent on the costs at the point at which the costs are recorded

Question 11

What impacts cash flow?

Answer 11

• change in sales/change in demand
• change in costs e.g. commodity prices
• seasonality in sales
• business expansion or contraction
• credit terms can change e/g/ period of time or amount needed to pay a bill or invoice
• change in stock levels

Question 12

How do you calculate net-cash flow?

Answer 12

• net cash flow = cash inflows - cash outflows (in a given period)
• net cash flow = receipts/inflows - total payments
• net cash flow = closing balance - opening balance

Question 13

Uses of profit:

Answer 13

1. As a source of finance - reinvested back into business as retained profit
2. Given to owner or distributed between shareholders in the form of dividends

Question 14

Cash:

Answer 14

the money available for a business to spend immediately