26 Cash flow forecasting

Question 1

Define liquid asset

Answer 1

Asset that is easily changed into cash

Question 2

Define overheads

Answer 2

Money spent regularly on rent, insurance, electricity and other things that are needed to keep a business going

Question 3

Define insolvency

Answer 3

Inability to meet debts

Question 4

Define cash flow forecast

Answer 4

A financial document that shows the expected cash inflows and cash outflows over a future period

Question 5

Define cash inflow

Answer 5

Flow of money into a business

Question 6

Define cash outflow

Answer 6

Flow of money out of a business

Question 7

Define net cash flow

Answer 7

The difference between cash inflows and cash outflows

Question 8

Define closing cash balance
State the formula

Answer 8

Amount of cash that the business expects to have at the end of each month (net cash flow + opening balance)

Question 9

State 4 reasons why cash flow forecasts are important

Answer 9

1. Identifying cash shortages and planning - knowing when it will need to borrow cash
2. Helps clarify aims and improve performance
3. Monitoring cash flow - compare predicted figures with real figures, to see where problems have occurred
4. Supporting applications for funding - lenders need business to support applications with a cash flow forecast

Question 10

What is the difference between cash and profit?

Answer 10

Profit is recorded when a sale is made, whereas cash is recorded when it is received. This means that a business selling on credit can be making a profit despite having no cash.