27 - Forcasting Cashflows

Question 0

What is liquidation?

Answer 0

This is when a firm stops trading and it’s a assets are sold to pay creditors

-This is a result of bankruptcy

Question 1

What is cash flow?

Answer 1

This is the sum of cash payments to a business (inflows) less the sum of cash payments (outflows)

• It relates to the timing of payments from debtors and payments to creditors and helps a business to maintain good cash and profit levels
• Equation, total cash inflows - total cash outflows

Question 2

What does it mean when a firm is insolvent?

Answer 2

This is when a firm is unable to pay its short term debts as they fall due, this is also known as illiquidity

Question 3

What are cash inflows?

Answer 3

These are payments to a firm in cash received from their debtors or from banks (loans)

Question 4

What are cash outflows?

Answer 4

These are payments in cash made by a business, such as those to suppliers and workers

Question 5

What are cash flow forecasts?

Answer 5

These are estimations of future cash inflows and cash outflows, usually on a month by month basis

E.g

• Bank loan payments (outflow)
• Debtors payments (inflow)

Question 6

What are debtors?

Answer 6

These are customers who have bought products on credit and will pay the cash at an agreed date in the future

Question 7

What is a net monthly cash flow?

Answer 7

This is an estimated difference between monthly inflows and monthly outflows

Question 8

What is the opening cash balance?

Answer 8

This is cash held by the business at the start of a month

Question 9

What is closing cash balance?

Answer 9

This is the cash held by a business at the end of a given month, which then becomes the following months opening balance

Question 10

What is the importance of cash flow forecasts?

Answer 10

With cash flow forecasts:
-Plans can be put in place to provide additional finance e.g bank overdrafts

• Plans can be made to reduce cash deficits if they are too great e.g cutting down on the purchase of machinery
• Plans can be made to invest more money into machinery is there is going to be a cash surplus

Question 11

What are the limitations of cash flow forecasts?

Answer 11

• Mistakes could be made in preparing the revenue and cost forecasts, especially if drawn up by inexperienced entrepreneurs or staff
• Unexpected cost increases could lead to major inaccuracies in the cash flow forecasts
• Fluctuations in prices can make it harder to draw up a reliable cash flow forecast
• Wrong assumptions can be made in estimating sales of the business

Question 12

What are the causes of cash flow problems?

Answer 12

-Lack of planning
Without planning, a firm could succumb to illiquidity as they wouldn’t be ready for future expenditures

-Poor credit control
This is when a firm doesn’t keep accurate track of their customer accounts and it results in a firm having to chase up for payment from debtors and there is also the potential for the accumulation of bad debt

-Allowing customers too much time to pay debts
The longer the credit period, the more likely the firm is to run short of cash. This is because they have to wait a longer time for the money to be paid

-Expanding too rapidly
This causes a firm to accumulating debt as they would not have the working capital needed to finance their growth. Cash flow shortages can result from it

-Unexpected events
Unforeseen circumstances can increase costs, these can be damaging to a firms cash flow as they are unpredictable

Question 13

What is credit control?

Answer 13

This is the monitoring of debts to ensure that credit periods are not exceeded

Question 14

What is bad debt?

Answer 14

This is unpaid customer bills that are now very unlikely to ever be paid

Question 15

What is over trading?

Answer 15

This is when a business expands rapidly without obtaining all the necessary finance, as a result cash flow shortages develop

Question 16

What are the methods of increasing cash inflows?

Answer 16

-Increasing cash inflows
Over drafts, flexible loans which can be drawn up to an agreed limit.
*Interest rates are high
*overdrafts can be withdrawn by banks and this often causes insolvency

Sale of assets, cash receipts can be obtained from selling off redundant assets

• selling assets quickly can result in a low price
• the asset might be required at a later date for expansion
• the asset could have been used as collateral for a bank loan

Sale and leaseback, asset can be sold to boost cash flow and leased back from the owner

• The leasing costs add to the annual overheads
• there could be loss of potential profit if the asset rises in price
• the asset could have been used as collateral for future loans

Reducing credit terms to customers, cash flow could be brought forward by reducing the amount of time debtors have to pay
*consumers may seek extended credit terms elsewhere

Debt factoring, Companies can buy the consumers unpaid debts

• the company will cover 90-95% of the debt, profit will be reduced
• the consumer has their debt paid by a finance company, which could suggest the business is in trouble

Question 17

What are the methods of reducing cash flows?

Answer 17

Delaying payments to suppliers (creditors), outflows will fall in the short term if they wait a longer period of time to pay creditors

• suppliers may reduce any discount offered with the purchase
• suppliers can either demand more cash on delivery or refuse to supply if they believe the risk of supplying is too great

Delay spending on capital equipment, by not buying equipment

• the efficiency of the business may fall as the equipment becomes outdated
• expansion becomes difficult as they are unable to increase scale of operation

Leasing instead of outright purchase, of capital equipment, the firm avoids large capital expenditure through leasing

• the asset is not owned by the business
• may be more expensive in the long term