3.3b Cash Problems

Question 1

What is a cash flow statement?

Answer 1

A Cash Flow statement is a record of the cash inflows and outflows to a business in the past.

Question 2

How can you use a cash flow statement? (3 answers)

Answer 2

• It can be used to monitor the performance of the business.
• It can be used to compare performance from month to month/year to year.
• Past cash flow can be compared with predicted cash flow.

Question 3

What are cash inflows?

Answer 3

Cash inflows are all the money that comes into the business

Question 4

Give some examples of cash inflows for a business (3 answers)

Answer 4

Cash from selling assets
Cash from customers in making sales
Cash from interest on loans given out

Question 5

What are cash outflows?

Answer 5

Cash outflows are all the money that’ll leave the business in order to pay its total costs

Question 6

How should a business act when estimating costs and why?

Answer 6

A business should be cautious when estimating costs, because it is better to estimate that costs will be higher than expected and have a plan in case money needs to be paid sooner than expected

Question 7

What are some examples of cash outflows for a business? (4 answers)

Answer 7

Advertising and marketing
Wages
Cost to make the product + cost of equipment
Legal and accounting costs

Question 8

What is the net cash flow

Answer 8

The net cash flow is the difference between the cash inflows and cash outflows

Question 9

How do you calculate net cash flow?

Answer 9

By using the formula:

net cash flow = cash inflows - cash outflows in a given period.

Question 10

What can a business use a net cash flow figure for?

Answer 10

A business can use a net cash flow figure to see if there is sufficient money in the business to cover its costs. They can also use it to look ahead and work out if they’ll need to borrow money and if so, for how long

Question 11

What is the opening balance?

Answer 11

The opening balance is the amount of money in the business’ bank acquired at the start of any period

Question 12

What is the closing balance?

Answer 12

The closing balance is the amount of money at the end of each month

Question 13

How do you know what the opening balance for a month is?

Answer 13

The opening balance is the closing balance for the previous month

Question 14

What is the closing balance?

Answer 14

The closing balance is the amount of money in the bank at the end of each month?

Question 15

How do you calculate the closing balance?

Answer 15

To calculate closing balance:

closing balance = opening balance + net cash flow

Question 16

How is a cash flow forecast laid out (6 points)?

Answer 16

–The months are written at the top of the forecast

• -The cash inflows are written in one table with the total cash inflows
• -The cash outflows are written in one table with the total cash outflows

–The net cash flow is recorded

The opening balance and closing balances are shown

The total costs for each category (row) are recorded in a total (£) column on the right

Question 17

What is a receipt?

Answer 17

A receipt is 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 18

What do businesses aim to have in terms of cash flow for each month?

Answer 18

Businesses aim to have positive cash flow, where more money is coming into the business than going out.

Question 19

What is a cash flow forecast?

Answer 19

A cash flow forecast is an estimate of how much cash will come into the business and how much will leave the business

Question 20

Why will creating a cash flow forecast be challenging to a new business?

Answer 20

As the entrepreneur has no previous years’ figures to help them estimate so there is some realistic thought, but also some guesswork required

Question 21

What are the uses of cash flow forecasts? (3 answers)

Answer 21

1. Businesses use them to plan future strategy e.g. if the projected net cash flow is negative they may have to change their 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 (a quantity of money) will also want a cash flow forecast/ this is part of the business plan.

Question 22

What are some cash flow problems for businesses? (6 answers)

Answer 22

1. Salaries can stretch
2. Overdraft is at its limit
3. Creditor arrears (money yet to be paid back)
4. No working capital
5. Lack of profit
6. Taxation arrears