3.5.4-Making financial decisions: improving cash flow and profits Flashcards
What is cash flow
the amount of money flowing into and out of a business over a period of time
What are cash inflows
receipts of cash into the business
What are cash outflows
payments of cash from the purchase of items for the business
What can affect the cash flow of a business?
amount of cash invented into the firm and held at the start of trading
the length of time taken to produce the product/service
the amount of stock held by a frim
goods sold on credit
the amount of credit given by suppliers
seasonality
examples of cash inflows
cash sales
receipts from trade customers
sale of spare assets
investments of share capital
personal funds invested
bank loan
govt. grants
examples of cash outflows
payment of wages and salaries
payment of suppliers
buying equipment
payment of dividends
repayments of loans
income tax, VAT
What is cash flow forecasting
the process of estimating the expected cash inflows and outflows over a period of time
What is a cash flow statement
a description of how cash actually flowed into and out of a business during a particular period of time
Fill in the blank
A business that has a negative bank balance is often said to have ……….. problems and a danger of being insolvent
liquidity
What is liquidity
measures a business’ ability to meet short term cash payments
What does insolvent mean for a business
when a business is unable to meet the short-term cash payments
How to analyse cash flows
calculate the difference between the closing balance and the opening balance at the start (you want to build up not reduce)
use the monthly closing balance to assess trends in data (it helps to see if there are any big decreases)
Analyse the timings of inflows and outflows (not all customers will pay straight away and the longer it takes them to pay the longer the business goes without the cash)
What are receivables
people who owe the business money, usually customers who have been given credit terms
also known as debtors
What are payables
people who are owed money by the business, usually these are suppliers awaiting payment
payments are also known as creditors
Why do businesses forecast cash flow
identifies potential cash flow problems in advance
helps make sure there is sufficient cash available to make payments
providing evidence for financial assistance
identifies if the business is holding too much cash
