3.6.2 Flashcards
cash flow
the money that flows into and out of a business on a day to day basis
how does cash flow into a business?
as receipts e.g. from loans
how does cash flow out of a business?
as payments e.g. to pay wages
net cash flow
the difference between money in and money out
are profit and cash flow the same?
no, they are two very different things
insolvent
a business runs out of cash and cannot pay its suppliers or worker
what is the name given to a positive net cash flow?
surplus
what is the name given to a negative net cash flow?
defecit
what are the effects of a positive cash flow?
-businesses do not need to borrow money and can avoid paying interest
-will be able to arrange long term loans easier
-reduce the risk of business failure
what does a cash flow forecast include?
-cash inflow (receipts)
-cash outflows (payments)
-net cash flow
-opening balance (same as the closing balance of the previous period)
-closing balance (opening balance combined with net cash flow)
what does a bracket mean in a cash flow forecast?
negative value
what is the importance of cashflow forecasting?
-to identify periods of cash shortfall so action can be taken to deal with this
-to identify periods of cash surplus so expenditure can be planned
-to secure additional funding e.g. from a bank
what are the consequences of cashflow problems?
-relationships with suppliers may deteriorate
-workers may leave
-it may have to cease training
what is more important cash or profit?
cash is more important than profit
what are the causes of cashflow problems?
-poor planning
-external factors
-inadequate credit control
-holding excessive stock
-investing too heavily in fixed assets
-overtrading, expanding quicker than available funds allow
