5.2 Cash-flow forecasting and working capital

Question 1

The importance of cash flow forecast [6]

Answer 1

1 identifies potential shortages of cash

2 Ensure business can afford to pay suppliers/employees

3 See whether trading performance 👉 cash

4 Spot prob with customer payments

5 discipline of financial planning

6 for external stakeholders
e.g bank

Question 2

The point of cash flow forcast

Answer 2

1 Identifies potential shortfalls in cash balances
“early warning system”
e.g, if forecast shows a negative cash balance then business needs to ensure it has a sufficient bank overdraft facility

2 See whether trading performance 👉 cash
(revenues, costs and profits) 👉 cash

3 Analyse whether business is achieving financial objs
from business plan

Question 3

How a short-term cash-flow problem might be overcome,

Answer 3

• increasing loans
• delaying payments
• asking debtors to pay more quickly

Question 4

what is working capital

+ calculation

Answer 4

working capital = current assets - current liabilities

• Pay staff wages and salaries.
• Settle debts and therefore avoid legal action by creditors.
• Benefit from cash discounts offered in return for prompt payment.

Question 5

Content of a cash flow forecast

Answer 5

• Cash inflow - income from sales
• Cash outflow - expenses
• Opening balance - amount of money in a business’s bank account at the start of the period
• Net cash flow
• Closing balance - amount of money in a business’s bank account at the end of the period

Question 6

what is a cash flow forecast

Answer 6

a statement that looks at the predicted cash inflows and the predicted cash outflows

*PREDICTED

Question 7

example of cash inflow

Answer 7

Capital: money that the owner puts into the business at the start. Might be savings/ start up bank loan

Sales revenue: This comes from busi selling goods – a major source of income for busi

Loans: amounts of money the business has borrowed, usually from banks.

Question 8

example of cash outflow

Answer 8

Purchases: to buy raw materials/ stock
Capital purchases are big purchases

Loan Repayments:
Business will have to pay back their loans and at a minimum they will have to pay back their interest to banks

Wages: payments to staff and associated payments
e,g: pension contributions and national insurance.

Question 9

factors that affect cash inflows and outflows

Answer 9

Late Credit Payments:
E.g. “Three months free credit” offered to customers – and then they don’t pay when you expect them to!

Seasonal Business:

Capital Expenditure - Having to invest in new equipment can expensive.