3.7 Cash Flow Flashcards
cash flow
cash inflow and cash outflow
payments received and made by the business
cash inflow
money earned by business
money in
cash outflow
cash paid out by the business
cash out
net cash flow
payments received by business - payments made by business
working capital
funds available in the business on day-to-day basis
difference between current assets and current liabilities
working capital formula
current assets - current liabilities
current assets: cash, debtors, and stock
current liabilities: 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 flow forecast
prediction of future cash inflows, outflows and net cash flow for a specific time period
opening balance
amount of cash the business has in the beginning of the month
closing balance
amount of cash that the business has at the end of the month
closing balance formula
opening balance + net cash flow for the month
importance of cash flow forecast
- helps company plan in advance
variance
difference between planned or budgeted sales revenue and costs and the actual sales revenue and costs
investment
spending by a business on non-current (fixed) assets
capital expenditure
positive (gross) profit margin
business can cover its costs of production and operation
debtor days and creditor days (cash flow and ratios)
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
reasons for poor cashflow
- poor stock management (hold too much stock)
- poor pricing strategy or low sales (priced product too low)
- expanding too fast
- high expenses
- seasonal demand
cashflow problems for non-profit social enterprises
vulnerable
- rely on grants and donations
ways to increase cash inflow
- effective debt collection
- cash transactions only
- increased promotion
- expanding product portfolio
- going public
- overdrafts
- loans
- government assistance
- sale of non-current (fixed) assets
effective debt collection
- system that ensures the money owed is paid on time
- reminding debtors
increased promotion
- reducing prices through pomotional pricing or increased advertising
(can be costly and increase outflows)
expanding product portfolio
diversifies risk
increases the revenue
increases cash inflow streams
going public
sell a portion of its ownership to outside investors by selling shares
raises funds
overdrafts
draw more money than the business has on the bank
loans
borrowing to cover immediate expenses
long-term ones are more avantageous
(however, has interest)
government assistance
grants and subsidies to companies which produce essential goods and services
low-interest loans for entrepreneurs needing financial assistance
sale of non-current (fixed) assets
increase cash inflow
careful not to sell assets that are difficult to replace
doesn’t guarantee stable cash inflow and subject to seasonal fluctuations
methods of reducing cash outflow
- better stock management
- renegotiate credit terms
- switch to cheaper suppliers
- reduce expenses
- lease rather than purchase equipment
better stock management
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
renegotiate credit terms
- renegotiate an extension for payment of its trade credit
- time to reduce cash outflows
switch to cheaper suppliers
- reduces cash outflow
- can reduce quality
reduce expenses
- cut unnecessary expenses
- can hinder the effective operations of the company (ergo, lower productivity)
lease rather than purchase equipment
- smaller monthly payments while using the asset
- however, doesn’t own it
