5.2 Cash Flow Forecasting Flashcards
Why is cash important for a business?
Cash is essential for paying workers, suppliers, landlords, and the government to avoid liquidation.
What is cash flow?
Cash flow is the cash inflows and outflows of a business over a period of time.
What are cash inflows?
Cash inflows are sums of money received by the business, including:
* sales revenue from products
* payment from debtors
* borrowed money
* sale of business assets
* investments from owners.
What are cash outflows?
Cash outflows are sums of money paid out by the business, including:
* purchasing goods and materials
* paying wages and salaries
* purchasing fixed assets
* repaying loans
* paying creditors.
True or False: Cash flow is the same as profit.
False. Cash flow and profit are not the same; cash flow considers only cash transactions.
What is a cash flow forecast?
A cash flow forecast estimates future cash inflows and outflows, usually on a month-by-month basis.
What does a cash flow forecast help a manager determine?
It helps determine:
* available cash for bills and assets
* required bank loans to avoid insolvency
* excess cash that can be invested.
What is the opening cash/bank balance?
The opening cash/bank balance is the amount of cash held by the business at the start of the month.
How is net cash flow calculated?
Net Cash Flow = Total Cash Inflow – Total Cash Outflow.
What is the closing cash/bank balance?
The closing cash/bank balance is the amount of cash held by the business at the end of the month.
What are the uses of cash flow forecasts?
Uses include:
* determining cash needed to start a business
* providing statements for loan applications
* managing cash flow to avoid negative balances.
What can a business do to overcome negative cash flow?
Methods include:
* increasing bank loans
* delaying payments to suppliers
* asking debtors for quicker payments
* delaying or canceling capital purchases.
What is working capital?
Working capital is the capital required for paying short-term day-to-day expenses.
What forms can working capital take?
Working capital can be in the form of:
* cash for expenses
* cash due from debtors
* cash in inventory.
What is the risk of having too much inventory?
Too much inventory results in high costs.
What is the risk of having too little inventory?
Too little inventory may cause production to stop.
Fill in the blank: The total inflows and outflows must be calculated after each _______.
section.
