3.7 Cash flow Flashcards
cash flow definition
payments received by the business (inflows) and payments made by a business (outflows)
net cash flow
the payments recieved by a business minus the oayments made by the business
working capital
funds available in the business to meet the needs of its day to day operations. difference between current assets and current liabilities
working capital formula
current assets- current liabilities
what does current assets include
cash,, debtors and stock
current liabilities include
creditors, overdrafts, and short term loans
working capital cycle
process of turning current assets into cash that can be used to purchase the resources needed to produce a product
cash-> purchases of supplies to creditors_> production to stock inventory-> sales of product to debtors->
cash flow forecast
a prediction of future cash inflows, cash outflows and net cash flow for specific time period
opening balance
amount of cash the business has in the ank at the beginning of the month. if the business is new then it will not have an opening balance, so this figure would be zero
closing balance
refers to the amount of cash that the business has to the end of the month. it is the sum of the opening balance and the net cash flow. this closing balance then becomes the opening balance for the next month
closing balance formula=
opening balance + net cash flow for the month
investment
spending by a business on non current( fixed) assets; also known as capital expenditure
why is having excess free cash flow good
allows public companies to buy back there own shares or distribute investors
positive profit margin
the business should be able to cover its costs of prroduction and operation
debtor days
a measure of the average number of days it takes a business to collect its debts
debtor days formula
debtors/sales revenue x 365
creditor days
a measure of the average number of days it takes a business to pay its debts
creditor days formula
creditors/cost of sales x 365
reasons for poor cash flow
- poor stock management: holding too much stock, spending too much
- poor pricing strategy or low sales
- expanding too fast: business may invest and spend on expansion too quickly
- high expenses
- seasonal demand
why do non prodit social enterprises vulnurable
they rely on grants and doonatons which are unstable
effective debt collection (improving cash flow)
must make frequent phone calls and emails to make sure debtors pay on time. this could result in loss in clients. plus they must make credit check on customers
how to improve cash flow
effective debt collection
cash transactions only
increased promotion
expanding product portfolio
going public
overdrafts
loans
government assistance
sales of assets
cash transactions only (improving cash flow)
reduce credit transactions, may lose customers
increased promotion (improving cash flow)
company could implement new promotion strategies like advertisement to increase sales- could be costly
expanding product portfolio (improving cash flow)
diversifies risk and increases revenye from wider range of products- could require cash outflows
going public (improving cash flow)
public held companies allow portion of ownership to outside investors through sales of shares
overdrafts (improving cash flow)
allow bysiness to draw out money- disadvatage due to interest
loans (improving cash flow)
borrowing from bank, however interest and terms could be changed
government assistance (improving cash flow)
government could grand subsidies to companies that produce essential goods and services + low interest loans
sale of non- current (fixed) asset (improving cash flow)
increase cash inflow by selling some of its disused non current assets such as old machinery. not stable cash inflow
how can non profit social enterprises (improving cash flow)
- campaign to increase donations
- promote subscription based donations
- research and apply additional grants
- use crowdfunding
reducing cash outflow
better stock management
renegotiate credit terms- extensions for payment
switch to cheaper suppliers
reduce expenses- like staff parties electricity, could lower productivity
lease equipment- smaller monthly payments
