Booklet E Flashcards
What is cash flow?
The net balance of cash moving in and out of a business over a period of time.
What is a cash flow forecast?
A document that shows the predicted flow of cash into it now the business over given period of time normally 12 months
Why is having a healthy cash flow important?
Having a healthy cash flow is crucial to the survival of a business. A healthy cash flow means that a business will have enough cash at one point in time to be able to meet demand for short term cash outflows.
What are cash inflows and receipts?
Money coming into a business from various sources.
Name the six sources of cash inflows or receipts
Cash sales, credit sales, loans, capital introduced, sales of assets, bank interest received.
Define what cash sales are
The customer pays at the time of purchase
Define what credit sales are
The customer pays in a preagreed period after the sale for example 30 days.
Define what loans are
Bank loans to fund the purchase of assets such as machinery and vehicles.
What is capital introduced?
Money invested from entrepreneurs or shareholders when a business is first set up or looks to expand.
What is sales of assets?
The sale of items owned by the business which no longer needed in order to bring short-term cash injection to the business.
What is bank interest received?
Interest paid by the bank on credit balances.
What are cash out flows or payments?
Money going out of the business for various purposes
Name the 10 purposes which cash flows or payments are used for:
Cash purchase, credit purchases, purchase of assets, value added tax (VAT), bank interest paid, rent, salaries, wages, utilities.
What is cash purchase?
Items purchased by a business and paid for at the time of purchase.
What is credit purchases?
Items purchased by a business and paid for at a later point in time.
What is purchase of assets?
Non current assets that a business is likely to keep for more than one year such as machinery and vehicles.
What is value added tax?
Businesses that are VAT registered must pay VAT to HMRC and should be shown in the cash flow forecast
What is an opening balance?
How much money the business has at the start of the month
What is a closing balance?
How much money a business has at the end of the month
What is the formula to figure out closing balances?
Opening balance + cash inflow - cash outflow = closing balance
What has two major influences on a business’s cash flow?
Credit periods
Why is it important to keep a close eye on a businesses financial affairs?
If a business both sells on credit and buys on credit from its suppliers it needs the first to have a shorter credit period than the second
What does the term liquidity?
Measures a firm’s ability to meet short term cash payment
What does insolvent mean?
When a firm is unable to meet short term cash payments
How does a problem occur with a cash flow forecast?
When the business’s outflows are greater than the businesses opening balance plus the inflows
What are fluctuations known as with cash flows?
The cash flow cycle
What are overdraft arrangements?
Arrangements made with the bank for when there is a negative cash flow
What is negotiating terms with creditors?
If a business has cash flow problems they could try and negotiate a longer payment term
What is reviewing and rescheduling capital expenditure?
Reviewing cuts in capital expenditure that could be made and then scheduling when they could be put in place
What are the benefits and limitations of cash flow forecasts
Benefits
- encourages planning for cash inflows and outflows
- can be used as part of a business plan to help raise finance
Limitations
- forecast may be inaccurate
- cannot plan for unexpected events
What is breaking even?
Breaking even is the point at which a business is not making a profit or a loss
Name three costs to a business
- variable costs
- fixed costs
- total costs
Name three terms that influence influence revenue
- total revenue
- total sales
- selling price
Name the formula used to calculate the break even point
Break even point = fixed costs / contribution per unit
What is the formula for contribution per unit
Selling price - variable costs per unit = contribution per unit
Name the formula for total contribution
Sales revenue - total variable costs = total contribution
Name the formula for total variable costs
Variable costs per unit x quantity = total variable costs
Or
Contribution per unit x number of units sold = total variable costs
What are the benefits and limitations of contribution per unit?
Benefits
- straight forward to calculate
- allows for the calculation of break even level of output
Limitations
- assumes that prices remain constant
- does not take into account fixed costs
What’s the formula for total costs?
Total cost = Fixed cost + variable costs
Formula for break even point
Break even point = fixed cost / contribution per unit
Formula for margin of safety
Margin of safety = Actual sales in units - break even level of output
Formula for margin of safety in value
Margin of safety x selling price
