Cash flow

Question 1

define liquidation

Answer 1

this is when the business is forced into selling everything it owns to pay its debts

Question 2

define cash inflow

Answer 2

cash inflow of a business is the sum of money received by a business over a period of time e.g. sales revenue from sale of products

Question 3

define cash outflow

Answer 3

cash outflow of a business is the sum of money paid out of the business over a period of time e.g. paying creditors

Question 4

how to calculate net cash flow

Answer 4

total cash inflow - total cash outflow

Question 5

define closing cash balance

Answer 5

the amount of cash held by the business at the end of the month

Question 6

how to calculate closing cash/ bank balanace

Answer 6

net cash flow + opening cash/ bank balance

Question 7

one thing to take note of!!!!!

Answer 7

the closing cash/ bank balance is the opening cash/ bank balance for the next month!

Question 8

in a cash flow statement what does a bracket mean

Answer 8

figures in a bracket denote a negative figure

cash outflow > cash inflow

Question 9

uses of a cash flow forecast

Answer 9

-keeping bank manager informed
a statement of cashflow forecasts are required by the business when applying for a bank loan

-starting up a business
manager needs to know how much cash is required to set up a business and the cash flow forecast helps to calculate the cash outflows such as rent etc

-managing cash flow
if the cash flow forecast gives negative cash flow for a month or months the business will need to apply for an overdraft so that negative balance is avoided
-running an existing business

Question 10

how to overcome cash flow problems in the short run??

Answer 10

• increase bank loans: this will inject more cashflow into the business, however the business will face regular interest payments that will need to be repaid causing cash outflows in future
• ask debtors to pay more quickly: this will increase cash inflow of the business however customers may move to businesses that offer time to pay
• delay payment to suppliers: this will help decrease cash outflows in the business however suppliers may refuse to offer credit for future payments and may reduce discounts for late payments
• delay or cancel capital equipment: this will reduce cash outflows but compromises high efficiency and the firm loses out on buying new technology and have to continue with old machinery

Question 11

how to overcome cash flow problems in the long run??

Answer 11

• develop new products to attract new customers
• increase efficiency to cut costs
• attract more investors

Question 12

importances of a cash flow forecasts

Answer 12

• 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
• whether the business has too much cash that could be put to a profitable use

Question 13

define opening cash/ bank balance

Answer 13

this is the amount of cash held by the business at the beginning of the month