Cash Flow

Question 1

Cash flow

Answer 1

The money that flows into and out of a business on a day to day basis

Question 2

Cash inflows

Answer 2

Income from sales, loans from banks, sale of assets, money invested by owners

Question 3

Cash outflows

Answer 3

Resources, wages, transport, marketing, tax, loan repayments, rent

Question 4

Why positive cash flow is important

Answer 4

Businesses need a positive cashflow to operate. Otherwise, it couldn’t pay bills, suppliers ect. 70% of businesses that fail in their first year of trading is because of cash flow difficulties. When outflows take place before inflows, it is possible that the business would be short of cash.

Question 5

Cash flow equation

Answer 5

Cash inflow-cash outflow=net cashflow

Question 6

Benefits of having a positive cash flow position

Answer 6

Businesses don’t need to borrow and can avoid paying interest
Can arange long term loans
Reduces risk of failure

Question 7

Cash flow forecast

Answer 7

A plan of the expected inflows and outflows to and from a business over a period of time

Question 8

Cash flow statement

Answer 8

A record of cash inflows and outflows that took place over a period of time

Question 9

(Sections of a cash flow forecast) cash inflows are…

Answer 9

…normally at the top. When added, they equal ‘total cash inflow’

Question 10

(Sections of a cash flow forecast) cash outflows are…

Answer 10

…normally next after inflows. When added, they equal ‘total cash outflow’

Question 11

(Sections of a cash flow forecast) net cash flow

Answer 11

Net cash flow = Total inflow - Total outflow

Question 12

(Sections of a cash flow forecast) opening balance

Answer 12

The figure which the business had as cash on the last trading day of the previous month

Question 13

(Sections of a cash flow forecast) closing balance

Answer 13

The figure at the end of the month

Question 14

The importance of cash flow forecasts

Answer 14

Helps businesses overcome and prepare for cash flow problems in two ways:
-managers can identify when the business might be short of cash
-managers can take suitable actions to avoid cash shortages being a major problem

Question 15

Causes of cash flow problems

Answer 15

Poor management, making a loss, offering customers too long to pay

Question 16

Solutions to cash flow problems

Answer 16

Reschedule payments (e.g. ask for more time from suppliers), cut costs, use overdrafts, find new sources of cash inflows

Question 17

Selecting the best solutions to cashflow problems needs to involve considering:

Answer 17

-cause of the cash flow problem (e.g. giving customers too long to pay, best solution is too offer less trade credit)
-the business’s circumstances (e.g. in a new market, offering trade credit could attract customers)