5.2 – Cash Flow Forecasting and Working Capital Flashcards
Why is cash important?
If it doesn’t have any cash to pay it’s workers, suppliers, landlord and government, the business could go into liquidation– selling up everything it owns to pay it’s debts. The business needs to have an adequate amount of cash to be able to pay all it’s short-term payments.
What is the Cash Flow of the business?
Businesses cash inflows and cash outflows over a period of time.
What are Cash Inflows?
The sums of money received by the business over a period of time.
What are examples of Cash Inflows?
Sales revenue from sale of products
Payment from debtors– debtors are customers who Have already purchased goods from the business but Didn’t pay for them at that time
Money borrowed from external sources, like loans
The money from the sale of business assets
Investors putting more money into the business
What are Cash Outflows?
The sums of money paid out by the business over a period of time.
What are examples of Cash Outflows?
Purchasing goods and materials for cash
Paying wages, salaries and other expenses in cash
Purchasing fixed assets
Repaying loans (cash is going out of the business)
by paying creditors of the business- creditors are suppliers who supplied items to the business but were not paid at the time of supply.
What is the Cash Flow Cycle?
- Cash needed to pay for
- Materials, Wages, Rent, etc.
- Goods produced
- Goods Sold
- Cash payment received from goods sold
What is the difference between Cash Flow and Profit?
Profit is the surplus amount after total costs have been deducted from sales. It includes all income and payments incurred in the year, whether already received or paid or to not yet received or paid respectfully.
In a cash flow, only those elements paid by cash are considered.
What is a Cash Flow Forecast?
An estimate of future cash inflows and outflows of a business, usually on a month-by-month basis.
How does this tell the manager?
How much cash is available for paying bills, purchasing fixed assets or repaying loans
How much cash the bank will need to lend to the business to avoid insolvency (running out of liquid cash)
Whether the business has too much cash that can be put to a profitable use in the business
What is the Opening Cash Balance
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 Balance and how do you find it?
The amount of cash held by the business at the end of the month.
The net cash flow is added to opening cash balance to find the closing cash balance
What are the uses of Cash Flow Forecasts?
When setting up the business the manager needs to know how much cash is required to set up the business.
A statement of cash flow forecast is required by bank managers when the business applies for a loan.
Managing cash flow– if the cash flow forecast gives a negative cash flow for a month(s), then the business will need to plan ahead and apply for an overdraft so that the negative balance is avoided
How can cash flow problems be overcome?
Increasing bank Loans
Delaying Payments to Suppliers
Asking Debtors to pay more quickly
Delay or cancel purchases of capital equipment
