3.6

Question 1

what is cash?

Answer 1

Its is money that’s gets into the business in the form of: sale of goods, investment by shareholders and funds from financial institutions (i.e. banks).

Question 2

why is cash needed?

Answer 2

Cash is needed to pay day-to-day bills, such as wages, electricity, payment to suppliers, etc.

Question 3

what can a lack of cash lead to?

Answer 3

Lack of cash can lead to bankruptcy of the business.

Question 4

what is cash flow?

Answer 4

It is the money that flows in and out the business in a particular period of time.

Question 5

what does a positive cash flow allow for?

Answer 5

A positive cashflow will enable the firms to fulfil its day-to-day running costs

Question 6

what are the two ways one classifies cash flow?

Answer 6

Its is classified as Cash Inflows and Cash Outflows.

Question 7

what is a cash inflow?

Answer 7

money received by the business

Question 8

hat is cash outflow?

Answer 8

money paid out by the business in a determined period of time

Question 9

what is profit?

Answer 9

profit is nothing but the positive difference between the total revenue and the costs.

Question 10

what is the difference between cash flow and profit?

Answer 10

The main difference between profit and cash flow has to do with credit.
That is, when a firm sales its products (or services) the costumers can pay by cash or credit and that will be positive for the profits but not so much for the cash flows.

Question 11

what is insolvency?

Answer 11

when a business runs out of cash but it is still profitable.

Question 12

when can insolvency happen?

Answer 12

The firm allowed costumers very long credit periods

Paying suppliers too early, leaving the firm with little or no cash

Buying new equipment or new assets in that particular month

Paying the firms debt with the cash (in that month)

Buying too much stock with cash that is supposed to cover other costs of the business (also know as overtrading)

Question 13

what does it mean when a firm has a positive cash flow but is unprofitable?

Answer 13

the business will have a lot of cash but the sales are not enough to generate profit. This cash can come form different sauces such us:

Bank Loans
Sale of some fixed assets for the business (i.e. land, buildings, etc)
From Shareholders

Question 14

what is a cash flow forecast?

Answer 14

Cash flow forecast is a financial document that shows the expected monthly movements of cash inflows and cash outflows of a business.

Question 15

what is the opening (cash) balance of a cashflow forecast?

Answer 15

it is the amount of cash the business has at the beginning of every trading period (i.e. Month). It is important to mention that the opening balance is the same value as the previous moths’ closing balance.

Question 16

what is the total cash inflow on the cash flow forecast?

Answer 16

the sum of all the inflows of a particular month (i.e. payments made by debtors, loans from banks, income from renting any property, sales of a fixed asset, etc.)

Question 17

what is the total cash outflow on a cash flow forecast?

Answer 17

refers to the total cash that leaves the business in a particular month (i.e. rent, bills to be paid, wages, taxes, payment to creditors, etc.)

Question 18

what is the net cash flow on a cash flow forecast?

Answer 18

its is the difference between cash inflows and cash outflows. This figure should ideally be positive although it is possible that it would be negative if a business is suffering cash flow problems.

Question 19

what is the closing (cash) balance on a cash flow forecast?

Answer 19

this is the estimated cash available at the end of every month. Its is calculate by adding the Net cash flow of one month to the opening balance of the same month.

Question 20

what are the advantages of a cash flow forecast?

Answer 20

It is a very useful document for anyone that wants to “start-up” a business. Providing estimated projections.

Allows a business to see when they might need a loan or any other type of finance. If positive, the firm can show its solvency to investors (i.e. Banks)

It helps compare predicted figure with actual figures so the business can assess where the problems lie.

Question 21

what are the disadvantages of a cash flow forecast?

Answer 21

Only accounts for a small portion of the year

Only a rough estimate, not very accurate

May not take into account payments that will affect the business in the future

Question 22

what is the difference between a cash flow statement and a cash flow forecast?

Answer 22

A cash flow statement is a financial document that shows the details of actual cash inflows and cash outflows of the business, for a period of time.

It can be used TO HELP prepare the cash flow forecasts, which are PREDICTIONS of the cash flows.

Question 23

what are some common cash flow issues?

Answer 23

Overtrading – when a business tries to expand to quickly or aggressively without sufficient resources to do it.

Overborrowing – the more money the firm borrows the more interest they will have to pay (on top of the actual debt)

Overstocking – when a firm holds to much stock as a result of an ineffective stock control

Poor credit control – when the firm offers costumers an extended credit period.

Question 24

what is an investment?

Answer 24

Investment refers to the act of spending money on purchasing an asset with the expectation of future earnings.

Some examples of some financial investments are: buying stocks, bonds or property. All investments are risky specially if there a changes in the market.

Question 25

what is the relationship between a start ups investment, profit and cashflow?

Answer 25

inverstement- high diue to purchase of initial assets and start up costs.

profit- no profit as costs are not met yet.

cashflow- cash flow is negative, outflows are significantly higher than cash inflows.

Question 26

what is the relationship between a growing business and investment, profit and cashflow?

Answer 26

investment- could still be high as businesss is not fully established.

profit- there is a small profit as enough revenue is generated to cover costs.

cash flow- cash flow may be positive, however will remain low until cash inflow increase, perticually from sales revenue.

Question 27

what is the relationship between a established and thriving business and investment, profit and cash flow?

Answer 27

investment- can be low as firm can plough through profits.

profit- high profit is achieved.

cash flow- cash flow is positive, cash inflow is higher than cash outflow.

Question 28

what are the three strategies to deal with cash flow problems?

Answer 28

Reducing cash outflows

Improving cash inflows

Seeking alternative sources of finance

Question 29

how can you reduce cash outflow?

Answer 29

Negotiate late payment with suppliers and creditors-The business will have extra cash for its short-term needs. However, negotiations can be time consuming and relationships with suppliers and creditors might be affected by these.

Purchases of fixed assets can be delayed- The firm can delay the purchase of machinery or equipment (specially the most expensive ones). However, if the machines or equipment are becoming old or obsolete this could affect the efficiency of the business.

Decrease some expenses- Some specific expenses like Marketing or advertising will not affect the cost of production. However, it could affect the demand for the product.

Source from cheaper suppliers-This will reduce the cost of raw materials or essential stock but the quality of the product might be compromised and hence affect sales in the future

Question 30

how can you improve cash inflows?

Answer 30

cash payments only-This will avoid the problem of delay payments but this might lead the customers to buy from competitors that allow credit

Create incentives for creditors to pay early-Offering discounts to pay earlier might help the cash flow. However, this could also create losses for the firm since they will receive less money.

Diversify the product on offer-With a better variety of products the business is more likely to generate more revenue through higher sales. But product diversification always comes at a cost.

Change pricing policy-This is a “cut price” (sale) strategy, which only works in the product is at the end of its cycle. Even though this might generate cash, cutting the price on brand new products would definitely create a loss for the firm.

Question 31

how can you seek alternative sources of finance?

Answer 31

selling fixed assets-This should be focused on obsolete or unused assets. It is not advisable to sell assets that are still needed unless completely unavoidable.

overdrafts-Temporarily take more money that exists from the firms’ bank account. However, the interest rate are higher with this resource.

sale and lease back-Sell assets and the lease back, can generate more cash for the firm. However, this will be more costly for the frim in the long-run since they won’t be able to use the asset as a collateral

debt factoring-When an external party takes over the ‘debt collection’ for the business paying the debt minus their commission. Even though it is a good way to get cash quickly the firm will not get the full amount of the debt.

government assistance-Some business qualify for Government grants, subsides or low-interest loans to help increase their cash flows. The negative aspect of this is that Government help comes with specific terms and conditions that the firm will be tied up to.

Question 32

what are somethings that can limit your cash-flow forecast? (make it inaccurate)

Answer 32

marketing-Poor market research can lead to incorrect sales forecast. Also, Distasteful or offensive marketing campaigns can affect the sales of the firm.

human resources- Demotivated employees becomes less productive and can provide poor customer service, less productivity and hence less sales.

operations managements-Failure or machine breakdown is difficult to predict and will obviously affect production and hence the firms’ cash flow.

competitors-It is very difficult to predict competitors behaviour but it is also very linked to the firms cash flow position and success (i.e. Toyota’s aggressive but appealing marketing in the USA directly affected the sales of its competitor General Motors and Ford)

trends-A favourable change in demand means that the cash flow will be more positive that originally forecasted. However, the exact opposite might happen.

unexpected changes in the economy-Interest rate fluctuations and higher rates of inflation can affect consumer’s behaviour and producer confidence. If changes are positive (i.e. less borrowing interest rate, can lead to more credit access) it will have a positive effect on the firm.

Question 33

if you are not given a opening balance for the cash flow forcast what do you put for the first month in that row?

Answer 33

a 0, and then the closing balance is just the net cash flow.

Question 34

when doing cash flow forcast be careful with credit, this gets given to you in the future months, not immidatly.