3.7 Cash Flow

Question 1

cash flow

Answer 1

cash inflow and cash outflow

payments received and made by the business

Question 2

cash inflow

Answer 2

money earned by business

money in

Question 3

cash outflow

Answer 3

cash paid out by the business

cash out

Question 4

net cash flow

Answer 4

payments received by business - payments made by business

Question 5

working capital

Answer 5

funds available in the business on day-to-day basis

difference between current assets and current liabilities

Question 6

working capital formula

Answer 6

current assets - current liabilities

current assets: cash, debtors, and stock

current liabilities: creditors, overdrafts, and short-term loans

Question 7

working capital cycle

Answer 7

process of turning current assets into cash that can be used to purchase the resources needed to produce a product

Question 8

cash flow forecast

Answer 8

prediction of future cash inflows, outflows and net cash flow for a specific time period

Question 9

opening balance

Answer 9

amount of cash the business has in the beginning of the month

Question 10

closing balance

Answer 10

amount of cash that the business has at the end of the month

Question 11

closing balance formula

Answer 11

opening balance + net cash flow for the month

Question 12

importance of cash flow forecast

Answer 12

• helps company plan in advance

Question 13

variance

Answer 13

difference between planned or budgeted sales revenue and costs and the actual sales revenue and costs

Question 14

investment

Answer 14

spending by a business on non-current (fixed) assets

capital expenditure

Question 15

positive (gross) profit margin

Answer 15

business can cover its costs of production and operation

Question 16

debtor days and creditor days (cash flow and ratios)

Answer 16

minimise debtor days and maximise creditor days

debtor days: measures how quickly a business can collect payment
creditor days: measures how quickly a business pays the money it owes

Question 17

reasons for poor cashflow

Answer 17

• poor stock management (hold too much stock)
• poor pricing strategy or low sales (priced product too low)
• expanding too fast
• high expenses
• seasonal demand

Question 18

cashflow problems for non-profit social enterprises

Answer 18

vulnerable
- rely on grants and donations

Question 19

ways to increase cash inflow

Answer 19

• effective debt collection
• cash transactions only
• increased promotion
• expanding product portfolio
• going public
• overdrafts
• loans
• government assistance
• sale of non-current (fixed) assets

Question 20

effective debt collection

Answer 20

• system that ensures the money owed is paid on time
• reminding debtors

Question 21

increased promotion

Answer 21

• reducing prices through pomotional pricing or increased advertising
  (can be costly and increase outflows)

Question 22

expanding product portfolio

Answer 22

diversifies risk
increases the revenue
increases cash inflow streams

Question 23

going public

Answer 23

sell a portion of its ownership to outside investors by selling shares
raises funds

Question 24

overdrafts

Answer 24

draw more money than the business has on the bank

Question 25

loans

Answer 25

borrowing to cover immediate expenses long-term ones are more avantageous (however, has interest)

Question 26

government assistance

Answer 26

grants and subsidies to companies which produce essential goods and services low-interest loans for entrepreneurs needing financial assistance

Question 27

sale of non-current (fixed) assets

Answer 27

increase cash inflow careful not to sell assets that are difficult to replace doesn't guarantee stable cash inflow and subject to seasonal fluctuations

Question 28

methods of reducing cash outflow

Answer 28

- better stock management - renegotiate credit terms - switch to cheaper suppliers - reduce expenses - lease rather than purchase equipment

Question 29

better stock management

Answer 29

only stock goods popular with customers reduces the amount of cash tied up in stock business becomes reliant on the speed which suppliers fill the orders

Question 30

renegotiate credit terms

Answer 30

- renegotiate an extension for payment of its trade credit - time to reduce cash outflows

Question 31

switch to cheaper suppliers

Answer 31

- reduces cash outflow - can reduce quality

Question 32

reduce expenses

Answer 32

- cut unnecessary expenses - can hinder the effective operations of the company (ergo, lower productivity)

Question 33

lease rather than purchase equipment

Answer 33

- smaller monthly payments while using the asset - however, doesn't own it