1.3.3 - Cash And Cash Flow

Question 1

Cash

Answer 1

the asset that the business holds which allows it to buy supplies and pay wages

Question 2

Solvency

Answer 2

the possession of assets in excess of liabilities; ability to pay one’s debts.

Question 3

Receipts

Answer 3

A written acknowledgment that a person has received money in payment following a sale or other transfer of goods or provision of a service

Question 4

Overheads

Answer 4

Fixed costs that come from running an office, shop or factory which are not affected by the number of specific products or services are sold.

Question 5

Credit

Answer 5

The amount of money that a financial institution or supplier will allow our business to use which it must pay back in the future at an agreed time

Question 6

Insolvent

Answer 6

A buisness that is unable to pay its debts and/or owes more money that is owed

Question 7

Cash flow forecast

Answer 7

An estimate of how much cash will come into the business and how much cash will leave the business over the course of a year

Question 8

The cash flow forecast is made up of five main areas:

Answer 8

Cash inflows
Cash outflows
Net cash flows
Opening balance
Closing balance

Question 9

Cash inflows

Answer 9

All of the money that comes into the buisness

Question 10

4 areas of cash inflows

Answer 10

Sales - used equipment
Sales - consumables (items that get used up)
Hire
Repairs

Question 11

Cash outflows

Answer 11

All of the money that will the buisness in order to pay its fixed and variable costs

Question 12

Net cash flow

Answer 12

the difference between the cash coming into the business and the cash flowing out over a period of time.

Question 13

The uses of cash flow forecasts

Answer 13

1. Business use them to plan future strategy e.g. business may estimate that in a year’s time its net cash flow will be negative. It may not have the finance to cope and therefore will have to change its plans.
2. Businesses need to draw up cash flow forecasts if they want to borrow money e.g. bank
3. Any agency giving a grant will also want a cash flow forecast/ this is part of the business plan.

Question 14

Net cash flow =

Answer 14

Cash inflows - cash outflows

Question 15

Opening balance

Answer 15

The amount of money in the buisness’s bank account at the start of any period

Question 16

Opening balance =

Answer 16

Closing balance of the previous period

Question 17

Closing balance

Answer 17

The amount of money in the bank at the end of each month

Question 18

Closing balance =

Answer 18

Opening balance + net cash flow

Question 19

The importance of cash:

Answer 19

Pay its suppliers and other debts
Repay bank loans
Pay wages to employees
Buy raw materials and products to sell
Promote the business

Question 20

The difference between cash and profit

Answer 20

Cash is the given amount of money that is available for business to use to pay its debts. Profit is an absolute calculation involving total revenue and total cost over period of time.
A profitable business can still fail, if it experiences cash flow problems. This is because revenue is recorded before the business receives actual cash.

Question 21

What impacts cash flow?

Answer 21

Change in sales revenue/change in demands
Change in costs
Seasonality in sales
Business expansion or contraction
Change in stock levels
Credit terms can change