Capter 26: Cash Flow Forecasting (Version) Flashcards
What is cash in a business context?
Cash is the most liquid business asset, including notes, coins, and bank balances.
Liquid
Asset that is easily changed into cash.
Cash flow
Flow of money into & out of a business.
Why is cash important for businesses?
Without cash, businesses cannot trade; poor cash flow can lead to business failure.
What are the main reasons businesses need cash?
To pay suppliers, overheads, employees, and prevent business failure.
What happens if a business runs out of cash?
It may become insolvent and may have to close down.
How can a business control its cash flow?
By keeping financial records, planning with cash flow forecasts, and managing credit control.
What are cash inflows?
Flow of money into a business.
Examples of cash inflows?
Sales revenue, loans, owner investments, interest, and asset sales.
What are cash outflows?
Flow of money out of a business.
Drawings
Money taken out of the business by the owner for personal use.
Examples of cash outflows?
Wages, materials, rent, utilities, tax, and machinery purchases.
What is net cash flow?
The difference between the cash flowing in and the cash flowing out of a business in a given time period.
How can a cash flow forecast help a business?
By identifying cash shortages, supporting funding applications, aiding planning, and monitoring cash flow.
What is a cash flow forecast?
Estimate of future cash inflows and outflows of a business, showing the expected cash balance at the end of each month.
Why is monitoring cash flow important?
To compare predictions with actual results, detect issues, and make informed financial decisions.
What are overheads?
Money spent regulalry on rent, insurance, electricity, and other costs that are needed to keep a business operating.
Why is it important to pay suppliers on time?
Failure to pay suppliers on time may lead to them refusing to trade with the business in the future.
What is insolvency?
Inability to pay debts, which can lead to closure.
How does borrowing money affect cash flow?
It increases cash inflow but also creates future cash outflows due to repayment and interest costs.
Difference between cash and profit?
Cash flow is money moving in and out of a business, while profit the money left over after all expenses have been paid.
What happens if a business has a negative net cash flow?
It may need to borrow money, delay payments, or cut expenses to avoid financial trouble.
How does a cash flow forecast help in loan applications?
Lenders use it to assess if a business can repay borrowed money on time.
What impact do seasonal businesses have on cash flow?
They may experience high cash inflows in peak seasons and shortages in off-peak times.
Closing cash balance
Amount of cash that the business expects to have at the end of each month.
