3.7 Flashcards

1
Q

Positive Cash Flow and No Profit

A

If the cash comes from sources other than income, such as money from the owner or a loan. These are not income but rather liability.

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2
Q

Negative Cash Flow and High Profits

A

If owners take cash out of the business to pay personal expenses.

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3
Q

Cash flow vs Profit

A
  • Profit is the revenue remaining after deducting all costs associated with operating the business.
  • Cash flow is the amount of money flowing in and out of a business at any given time.
  • KEY DIFFERENCE BETWEEN PROFIT AND CASH FLOW IS TIME
  • Profit can’t show you the whole picture of how your business is doing financially because it can’t give you a day-to-day understanding of your business’s financial well-being.
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4
Q

Insolvent

A

When a business cannot meet its short term debts.

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5
Q

Net Cash Flow

A

The sum of cash payments into a business (inflows) less the sum of cash payments made by it (outflows).

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6
Q

Working Capital

A

Working Capital = Current Assets - Current Liabilities

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7
Q

Working Capital Cycle

A

Period of time between spending cash on the production process and receiving cash payments from customers.

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8
Q

Cash Flow Forecast

A

Produced for internal use within an organisation - not shown to shareholders but may be used to secure a bank loan.

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9
Q

Cash Flow Forecast Uses

A
  • Highlight periods when a negative bank/cash balance can be expected
  • Can be used to secure loans from the bank or venture capitalists
  • Help avoid liquidity problems
  • Used to help the business set budgets for each department
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10
Q

Cash Flow Forecast Limitations

A
  • Unexpected changes in economy
  • Poor market research
  • Demotivated employees, productivity is reduced
  • Competitors may change their strategies often resulting in this negatively affecting cash flow
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11
Q

Dealing with cash flow problems

A

Reducing cash outflow
Improving cash inflows
Looking for additional finance

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12
Q

Investment

A
  • Investing means spending money on an asset with the expectation of future earnings. Known as capital expenditure
  • Involves wealth creation, including the idea that the assets should appreciate in value over time
  • Investment comes with risk due to unexpected changes in market conditions within an economy
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13
Q

Relationship between investment, profit and cash flow

A

Business stage Investment:
- Startup: Involves high investment due to the purchase of initial assets or startup costs
- Growing: Investment could be high as the business is not yet established
- Thriving: Invesment may be minimal as retained profits can be used

Business stage Profit:
- Startup: There are no profits as costs are not yet met
- Growing: Small profit as revenue starts to be generated to cover costs
- Thriving: High profit is achieved

Business stage Cash Flow:
- Startup: Cash flow is negative
- Growing: Cash flow may be positive but low until sales revenue increases
- Thriving: Cash flow is positive

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