5.2 Cash-flow forecasting and working capital Flashcards
What is a liquid asset?
It can be immediately used to pay for goods and services.
What is cash flow?
The cash inflows and outflows over a period of time.
What is cash inflow?
Money coming into the business.
Give 3 examples of cash inflow.
Sale of goods, payments by debtors, borrowing money.
What is cash outflow?
Money going out of the business.
Give 3 examples of cash outflow.
Purchase of goods, payment of salaries, repaying loans.
What is the cash flow cycle?
The stages between paying out cash and receiving cash.
List the steps in a typical cash flow cycle.
Cash outflow → Goods produced → Goods sold → Cash received.
What happens when the cash flow cycle is long?
More working capital is needed.
Is cash flow the same as profit?
No, cash flow is about actual cash, profit can include credit sales.
What is insolvency?
When a profitable business runs out of cash.
Give 3 causes of insolvency.
Over-trading, long credit time, too many fixed assets purchased.
What is a cash flow forecast?
An estimate of future cash inflows and outflows.
What is the opening cash balance?
The cash held at the start of the month.
What is the closing cash balance?
The cash held at the end of the month.
How is net cash flow calculated?
Cash inflow – Cash outflow.
Give one use of a cash flow forecast when starting a business.
To estimate cash needs and avoid failure.
How can a cash flow forecast help get a loan?
It shows the bank when and how much money is needed and when it will be repaid.
Why is a cash flow forecast useful for an existing business?
To manage cash effectively and avoid problems.
Give one benefit of managing a high bank balance.
The money can be used for other areas of the business.
Give 3 short-term solutions to cash flow problems.
Increase bank loans, delay supplier payments, reduce credit period to customers.
What is a risk of delaying supplier payments?
Suppliers may stop giving discounts or goods.
What is a risk of reducing customer credit periods?
Customers may switch to competitors.
Why might a business delay buying fixed assets?
To reduce cash outflows in the short term.
Give 3 long-term solutions to cash flow problems.
Attract investors, cut costs, develop new products.
What is working capital?
The capital available for day-to-day expenses.
How is working capital calculated?
Current assets – Current liabilities.
Give 3 forms of working capital.
Cash, value of debtors, value of inventory.
Why is working capital important?
It shows financial strength and efficiency to investors and banks.
What are accounts?
The financial records of a firm’s transactions.
Who are accountants?
Professionally qualified people responsible for keeping accurate accounts and producing final accounts.
What are final accounts?
Accounts produced at the end of the financial year showing profit/loss and the worth of the business.
What is the simple equation for profit?
Profit = Sales revenue – total costs.
How can profit be increased?
By increasing sales revenue, reducing production costs, or a combination of both.
Why is profit important for private sector businesses?
It acts as a reward for risk-taking, a source of finance, and an indicator of success.
What does profit reward in the private sector?
Reward for enterprise and risk-taking.
How is profit a source of finance for businesses?
Profits after payments can be used to fund expansion.
What does profit show in the private sector?
That investing can be profitable or that investment should be avoided.
What is the difference between profit and cash?
Profit is derived from revenue, while cash can come from various sources like selling assets.
Why is profit important for public sector businesses?
It provides finance for developing state-owned businesses or improving efficiency.
Why is profit important for social enterprises?
To balance profit-making with their aims and ensure the firm’s survival.
What is an income statement?
A financial statement that records a business’s income and costs over time.
Who uses income statements?
Managers, banks, and investors to assess if a business is making a profit.
What are the main features of an income statement?
Revenue, cost of sales, gross profit, net profit, and retained profit.
What is revenue in an income statement?
The income from sales of goods and services.
How is revenue calculated?
Units sold × Price per unit.
What is the cost of sales in an income statement?
The cost of production or buying goods the business sells during a period.
How is the cost of sales calculated?
Opening inventories + Purchases – Closing inventories.
What is gross profit?
The profit made when revenue is greater than the cost of sales.
How is gross profit calculated?
Revenue – Cost of sales.
What is a trading account?
A section of the income statement that shows how gross profit is calculated.
What is net profit?
The profit made after deducting all costs from gross profit.
How is net profit calculated?
Gross profit – Overhead costs (Fixed costs).
What is depreciation?
The fall in the value of a fixed asset over time.
What is retained profit?
The net profit after taxes and payments to owners, which is reinvested into the business.
What is corporation tax?
Tax paid by limited companies from their net profit.
What are dividends?
Payments made to shareholders from profits.
What is retained profit after taxes and dividends?
The profit kept in the business after taxes and dividends are paid.
How do income statements help businesses?
They show profit or loss, help compare performance, and assess product profitability.
What can businesses compare using an income statement?
Their performance over time or with competitors.
What does an income statement show about individual products?
It helps assess their profitability.
What can businesses decide based on income statement results?
Which products to launch.
