23 - cash flow forecasting & working capital

Question 1

define cash flow

Answer 1

cash flows & outflows over a period of time.

Question 2

define cash inflow

Answer 2

sums of money received by a business during a period of time

Question 3

define cash outflows

Answer 3

sums of money paid out by a business during a period time.

Question 4

ways of increasing cash inflows

Answer 4

• sales revenue from sale of products
• payment from debtors– debtors are customers who have already purchased goods from the business but didn’t pay for them at that time
• money borrowed from external sources, like loans
• the money from the sale of business assets
• investors putting more money into the business

Question 5

ways of cash outflow

Answer 5

• purchasing goods and materials (inventory)
• paying wages, salaries and other expenses in cash
• purchasing non-current assets
• repaying loans (cash is going out of the business)
• paying creditors of the business- creditors are suppliers who supplied items to the business but were not paid at the time of supply.

Question 6

cash flow cycle

Answer 6

1. cash needed to pay for
2. materials, wages, rent, etc
3. goods produced
4. goods sold
5. cash payment received for goods sold

Question 7

difference between cash flow & profit

Answer 7

profit indicates the amount of money left over after all expenses have been paid
cash flow indicates the net flow of cash into and out of a business.

Question 8

define profit/formula

Answer 8

profits is the surplus after total costs - revenue

Question 9

define cash flow forecast

Answer 9

estimate of future cash inflows & outflows of a business, usually on a month-by-month basis.

Question 10

cash flow forecasts tells the manageR:

Answer 10

• how much cash is available for paying bills, purchasing fixed assets or repaying loans
• how much cash the bank will need to lend to the business to avoid insolvency (running out of liquid cash)
• whether the business has too much cash that can be put to a profitable use in the business

Question 11

cash flow forecasts are useful in the following situations:

Answer 11

• when setting up the business the manager needs to know how much cash is required to set up the business. The cash flow forecast helps calculate the cash outflows such as rent, purchase of assets, advertising etc.
• A statement of cash flow forecast is required by bank managers when the business applies for a loan. The bank manager will need to know how much to lend to the business for its operations, when the loan is needed, for how long it is needed and when it can be repaid.
• Managing cash flow– if the cash flow forecast gives a negative cash flow for a month(s), then the business will need to plan ahead and apply for an overdraft so that the negative balance is avoided (as cash come in and the inflow exceeds the outflow). If there is too much cash, the business may decide to repay loans (so that interest payment in the future will be low) or pay off creditors/suppliers (to maintain healthy relationship with suppliers).

Question 12

define net cash flow

Answer 12

is the difference, each month, between inflows & outflows.

Question 13

define closing cash/bank balance

Answer 13

amount of cash held by business at the end of each month.
this becomes the next month’s opening cash balance.

Question 14

define opening cash/bank balance

Answer 14

amount of cash held by the business at the start of month.

Question 15

methods of overcoming short-term cash flow problem, how it works, limitations

Answer 15

Increasing bank loans
* how it works - banks loan inject more cash into business.
* limitations - interest to be paid, reduces profits. loans to be rapid, cash outflow.

Delaying payment to suppliers
* how it works - cash outflows will decrease in short term.
* limitations - suppliers refusal to supply. lower discounts for late payments.

asking debtors to pay more quickly/insisting on only cash sales
* how it works - cash inflows increased in short term.
* limitations - customers purchase from another business offering time to pay (trade credit)

delay/cancel purchases of capital equipment
* how it works - cash outflows for purchase of equipment decreased.
* limitations - long-term efficiency of business could decrease w/o uptodate equipment.

Question 16

Methods of overcoming cash flow problems in long-term

Answer 16

Attracting new investors - selling more company shares - ownership affected
Cutting costs & increasing efficiency - employees disagreement, product quality affected.
Developing new products that’ll attract more customers - lengthy-process. needs cash in short term to pay for development.

Question 17

define working capital

Answer 17

capital available to a business in the short-term
to pay for day-to-day expenses.

Question 18

formula of working capital

Answer 18

current assets - current liabilties

Question 19

Working capital can be in the form of:

Answer 19

• cash needed to pay expenses
• cash due from debtors – debtors/credit customers can be asked to quickly pay off what they owe to the business in order for the business to raise cash
• cash in the form of inventory – Inventory of finished goods can be quickly sold off to build cash inflows. Too much inventory results in high costs, too low inventory may cause production to stop.