Cash, Cash Flow, Cash Flow Forecasts Flashcards
Why is cash important
- to pay suppliers, overneads and employees
- to prevent business failure
What is cash flow?
the process of cash flowing in and out of a business i.e. cash inflows and outflows
What is net cash flow?
The difference between cash inflows and cash outflows over a trading period
What are the main types of cash inflow
Cash sales
Receipts from trade customers
Sale of spare assets
Investment of share capital
Personal funds invested
Receipt of bank loan
Government grants
Main types of cash outflow
-payment of overheads, wages and salaries
- payment of suppliers, for example raw materials, inventories
- buying equipment
- interest on bonk loan / overdraft
- payment of dividends
- repayment of loans
- income tax, VAR and corporation tax
What’s the importance of cash flow forecasts?
identifies potential shortfalls in cash balances in advance.
Important part of financal planning.
Helps to spot problems with customer payments.
Ensures that the business can afford to pay suppliers ond employees.
External stakeholders, such as banks, may require a regular forecast.
What is a cash flow forecast
A table showing predicted opening balances, cash inflows, cash outflows, net cash flows ond closing balances over a trading period.
What is the opening balance?
The value of cash at the start of a trading period.
What is the closing balance?
The value of cash at the end of a trading period.
Equation for net cash flow
Net cash flow=total cash inflows-total cash outflows in a given period
Equation for opening balance
Opening balance = closing balance of previous period
Equation for closing balance
Closing balance = opening balance + net cash flow
What’s the difference between profit, cash and revenue
Profit is the main source of funds for an established business, whereas revenue eventually turn into cash inflows. Cash eventually turn into cash outflows.
Profit is only affected by running costs whereas cash is affected by start up, running and expansion costs. Profit is recorded when a sale is made and cash is recorded when it is received.
Common problems of cash flow forecasts
Sales prove lower than expected
Customer do not pay on time
The cost of production proves higher than expected
Certain costs are not included
One benefit of small businesses producing a cash flow forecast
Helps them to plan the amount of sales needed etc. this then helps them to survive and can prevent insolvency by identifying shortfalls in cash and arrange overdrafts/loans etc.
