5.2 Cash flow forecasting and Working Capital Flashcards
Why is cash-flow crucial?
Cash-flow can be just as crucial for business success, as cash is the life blood of the business.
Without enough cash the business will not survive.
What is cash?
It is money we can use right away to pay business bills or debts. It may not be physical cash, most transactions are online these days, but it has to be in a business bank account and available if needed.
What is cash inflow?
cash coming into the business
Give examples of cash inflow.
Payments Received from customers
Money from bank loan or overdraft
What is cash outflow?
cash going out of the business
Give examples of cash outflow.
Payments to suppliers, rent, workers’ salaries
Repayments to bank
What happens if cash outflows occur before cash inflows?
If the cash outflows all happen before the cash inflows the business will have cash flow problems.
Explain bankruptcy.
If the business can’t pay it’s workers they will stop working or if they can’t pay their suppliers production will stop. This will eventually force the business to stop operating and it will close. This is often referred to as bankruptcy
What is another term for bankruptcy?
insolvency
How does a business avoid bankruptcy?
To avoid this catastrophe the business has to ensure there is enough cash at all times so they can pay their bills.
Define liquidity.
Liquidity is the term used to describe cash flow.
What does it mean when a business is liquid?
it can pay it’s short term debts.
How do businesses manage cash flow?
To help manage cash flow businesses use a cash flow forecast. Managers can look into the future and see if they will have enough cash to pay all their short term debts.
What is a cash flow forecast?
A Cash flow forecast estimate of future cash inflows and outflows
How do you calculate net cash flow?
Net Cash Flow = Cash inflows – Cash outflows
Firstly we can increase the cash coming in to overcome a period when the business is short of working capital . If the business gets a loan of £100 this will mean they don’t run out of cash in January.
However, loans will be payable with interest, and it depends on whether a bank will lend Low Flo the money
Secondly, Low Flo may have the option of asking for money from sales early. In some cases businesses may have to wait for payment from sales. Therefore, if Low Flo asks for payment a month early it can improve the cash flow.
However, this may not be possible if Low Flo have already received payment straight away when it makes a sale. Also, they may lose customers who are unwilling to pay immediately, and go to another business instead.
Low Flo can also reduce the cash outflows. One way of doing this is delaying payment to suppliers. If Low Flo pays for the raw materials in February it means they can avoid having a negative cash flow in January.
However, suppliers may be unwilling to wait for payment, so delaying payment may not be possible.
Define working capital
capital available to a business day to day to pay short term debts.
How do you calculate working capital?
Working Capital = Current Assets – Current Liabilities
State the importance of working capital.
working capital is essential for the survival and effective operation of a business.
Working capital also shows the financial strength of a business.
Investors and banks will check to ensure a business has sufficient working capital before considering offering to finance a business.
