3.7 Cash Flow

Question 1

Cashflow forecast

Answer 1

a statement that shows the expected cash a business expects to receive and pay out over a period of time

Question 2

Difference between cashflow forecast and statement

Answer 2

Forecast is what the business predicts it to looks like whereas statement is what it actually turns out to be

Question 3

Inflows

Answer 3

Things that go into the business
EX:
sales revenue, owner’s capital, loan, sale of fixed assets

Question 4

Outflows

Answer 4

Things that go out of the business like payments
EX:
Rent, Wages, Purchase of inputs and materials, Utility payments

Question 5

Cashflow Forecast structure

Answer 5

A) Opening Balance
B) Cash inflows
C) Cash outflows
D) Net Cash Flow
E) closing balance

Question 6

Difference between profit and cash flow

Answer 6

Profit = revenue - Total Costs
Cash Flow = Cash inflows - Cash outflows
Main diff = timing
cash might be collected from business later
business could get trade credit from supplier

Question 7

Causes of cash flow problems

Answer 7

unprofitable business
giving too much trade credit too customers
expanding too quickly - spending too much
having too much stock - cash is tied up in stock and takes time to sell
Seasonal demand - e.g. ski manufacturer has no sales in summer

Question 8

Improving cash inflow

Answer 8

Improve credit term - e.g. reduce trade credit to customers - P: collect cash quicker C: could lose customers
Any sources of finance - e.g. bank loan, share capital, crowdfunding
Sell Assets
Short term promotion - e.g. discounts

Question 9

Reducing Cash outflows

Answer 9

Find cheaper suppliers
Delay payments to creditors
Delay spending on capital equipment
Cut unnecessary overheads
Reduce stock

Question 10

Working capital

Answer 10

Funds available for the day-to-day running of the business

Question 11

Working capital cycle

Answer 11

There is a period of time from buying inputs to receiving cash for sale
the longer this time period is, the longer it takes to collect cash from selling goods/services

Question 12

Liquidity

Answer 12

How quickly assets can be turned into cash

Question 13

Business investment

Answer 13

e.g. spending on fixed assets (Capital expenditure)
e.g. Business expands overseas

Question 14

Investment

Answer 14

large amount needed - buying assets, advertising, production

Question 15

What should an investment lead to in profit terms

Answer 15

investment should lead to higher future profits

Question 16

effects of investment on cash

Answer 16

large outflow at the beginning to pay for investment
followed by regular small cash inflows as profits increase