1.3.3 Cash and cash-flow Flashcards
What is cash-flow?
The flow of cash in and out of a business
What is cash inflow?
Cash paid into a business from a variety of sources
What is cash outflow?
Cash paid out of a business
What is a cash surplus (positive cash-flow)?
When a business experiences more cash inflows than cash outflows over the same period
What is a cash deficit (negative cash-flow)?
When a business experiences more cash outflows than cash inflows over the same period
Why is cash-flow so important?
Cash is critical to the survival of a business
Having too little cash = insolvency (can’t pay bills on time)
having too much cash = not earning any return (better to invest)
How might a highly profitable business fail?
If it does not have sufficient cash to pay its bills when they are due it risks becoming insolvent
What is cash-flow forecasts?
Show future cash inflows and outflows and are normally shown on a weekly or monthly basis
How can a cash-flow forecast help a business?
Predicts when cash flows in and out a business
Highlights future cash surpluses and deficits
Can be referred back to after cash transactions have been made to check they were correctly forecast
Financially plan ahead to minimise unexpected cash fulctuations
Make comparisons with previous periods to identify cash improvements or deterioration
Be more financially accurate, which can help with overall business planning
What can affect a cash-flow forecast?
Sales might not be consistent
Customers might be unable to pay, meaning cash inflows will be less than forecast
Costs may change or unexpected costs may occur
Ordering too much stock
What are ways to improve cash-flow?
Encouraging customers to pay up front
Sending prompt invoices
Chasing late payments from customers
Selling debts to a factoring company
Selling assets
Negotiating supplier trade credit terms
Using just in time stock ordering methods
Arranging an overdraft facility to allow for negative balances
