Business Unit 5 Cash flow - E1

Question 1

what is cash flow ?

Answer 1

cash flow is the money that enters and leaves a business as it makes and receives payements

Question 2

what are cash flow forecasts ?

Answer 2

Cash flow forecasts are detailed estimates of when and how cash is expected to flow into and out of a business

Question 3

what are the 3 sections in a cash flow forecast ?

Answer 3

Cash inflows
the running balance
Cash outflows

Question 4

what are examples of cash inflows ?

Answer 4

Sales
Loans
Sale of assets
Capital

Question 5

what are examples of cash outflows ?

Answer 5

Value added tax
wages
purchase of assets
rent
advertising
purchases
loan interest
utilities

Question 6

what is the running balance ?

Answer 6

The running balance is a calculation of the net effect of the cash inflows and the outflows on the businesses bank balance on a monthly basis

Question 7

what does the running balance show ?

Answer 7

It shows how much money the business anticipates it has or has not got in its bank account at the end of the month

Question 8

what is the formula for net cash flow

Answer 8

Net cash flow = Total cash inflows - Total cash outflows

Question 9

what is the formula for closing balance ?

Answer 9

closing balance = Opening balance + net cash flow

Question 10

what is the opening balanced in a cash flow forecast ?

Answer 10

The opening balance is the same as the previous months closing balance

Question 11

what is profit ?

Answer 11

a business makes profit if over a given time period its revenue is greater than its costs

Question 12

what does cash flow relate to ?

Answer 12

cash flow relates ot the timing of payments and receipts

Question 13

how do you interpret cash flow forcasts ?

Answer 13

Examine the net cash flow
Examine the closing balance
Look for patterns in the closing balance
Look at inflows and outflows in significant months

Question 14

How can cash flow be improved ?

Answer 14

• Increase cash inflows
• Decrease cash outflows

Question 15

how to change timings of cash flows ?

Answer 15

• speed up cash inflows
• Delay cash outflows

Question 16

ways on how to improve cash flow ?

Answer 16

• Arranging to buy equipement / machinery on hire purchase or lease the equipment. They can pay for it in instalments to save a large cash outflow in one month.
  Try to buy materials / purchases on trade credit. This will delay cash outflows
• Negotating terms with your customers , the trade credit offered to credit customers , this will speed up cash inflows. However , It may risk losing some of the credit customers
• Invest more capital into the business.This will increase cash inflows
• Arrange an overdraft if the bank will grant it
• Arrange a bank loan. This will increase cash inflows and will help cover the intital outlays of the equipement
• Try to increase sales
• rescheduling payements so that large payements are spread over a period of several smaller payments
• Reduce expenditure on some areas if possible.

Question 17

what are the benfits of cash flow forecasts in a business ?

Answer 17

• It encourages planning for cash inflows and cash outflows
• Enables cash flow to be monitored
• can be used as a part of a business plan to help raise finance
• Identifies in advance times of negative closing balance allows the business to plan for these
• Ensures cash are available to meet payments and maintain working capital
• Identifying perios of cash shortfall so remedial action like overdrafts can be arranged

Question 18

what are the limitations of cash flow forecasts in a business ?

Answer 18

• may be inaccurate
• are a predication based on estimate on figures
• can not plan for unexpected events
• owners and managers are likely to be optimistic when forecasting figures