3.7. Cash Flow

Question 1

What does it mean when there is good cash flow, poor profits

Answer 1

Cash is coming from sources other than sales revenue (e.g. loans, capital investments, etc.)

Question 2

What does it mean when there is poor cash flow, but good profits

Answer 2

Sales are good, but payment of loans, capital equipment, poor collections practices, and early payments of supplies can bring cash flow down

Question 3

Working capital cycle

Answer 3

Cash In

Payments to suppliers/employees/cash

Goods Produced

Goods Sold

                  Alternatively:

Cash In

Payments to suppliers/employees/cash

Services Rendered

(Lag in flow of cash in the cycle can lead to slow down of production/operations)

Question 4

What does the cash flow forecast show?

Answer 4

Financial document that shows expected monthly cash inflows and outflows

Question 5

Cash inflows

Answer 5

Usually from sales revenues when cash payment is received

Question 6

Cash outflows

Answer 6

Payment of bills, usually itemized expenses

Question 7

Net cash flow

Answer 7

The differences between cash inflow and outflow per period

Question 8

Causes of cash flow problems:

Answer 8

Overtrading

Overborrowing

Overstocking

Poor credit control

Seasonal or unforeseen causes

Question 9

How to calculate the Opening Balance?

Answer 9

Amount of cash at the beginning of the trading period

(Then Add Cash inflow from sales + other income

deduct cash outflow of expenses including: stocks, labor, etc.)

Closing balance is the opening balance of the next month