Cash flow

Question 1

What is the most important asset a business has in the short term and why

Answer 1

Cash as without it suppliers and employees can not be paid

Question 2

what is a forecast cashflow

Answer 2

Shows the expected flows of cash in and out of the business over a trading period in the immediate future

Question 3

What is a cash flow forecast

Answer 3

It tells us how much cash is or will be available to the business or how much is needed to keep the business running

Question 4

List the 3 parts that make up the cash flow forecast

Answer 4

1 revenue/income
2 expenses/outgoing
3 balances

Question 5

What is revenue

Answer 5

Income received by a business for goods sold- can be sub divided on a balance sheet eg sales and debtor repayments

Question 6

What are cash sales and debtor payments

Answer 6

cash sales are created when sales are made and payment is immediate
Debtor payments occur when goods are sold on credit and payments for goods sold can be up to 30 days - revenue is only entered when payment is made

All payments are total revenue

Question 7

What are expenses or expenditures

Answer 7

money spent by a business in the time shown - money going out of the business
They can be broken down but total expenses is all money going out

Question 8

How do you calculate net cash flow

Answer 8

take total expenses away from total revenue to give either a + or - figure. If expenses are greater than revenue it will be a - cashflow

Question 9

How do you calculate closing balance

Answer 9

If net cash flow is negative deduct it from opening balance if positive add to opening balance - cash flow at start of period

Question 10

What are cash flow statements based upon

Answer 10

they are likely flows of cash in and out of business based on past experience, current and likely economic trends and managers knowledge of the business

Question 11

how does a business use cash flow forecast

Answer 11

Examine difference between actual and forecast figures which allows action to be taken before the business is in crisis ie is enough money coming in to pay expenses if not a decision needs to be made where extra money will be gained

Question 12

What is liquidity

Answer 12

A measure of the available working capital; - enough cash flowing in and out of business

Question 13

what are the solutions to a predicted cash shortage

Answer 13

1 increase revenue - increase prices but this may decrease demand , new methods of distribution - but in shorter will increase costs and worsen cash flow
2 reduce costs - reduce wages but will impact on output, look for cheaper supplier could impact of quality,
3 delay payment - could delay deliveries, may be charged interest
4 extra funding - capital from owner, business loan, outside investor but they will want a share of the business, overdraft from bank, use invoice factoring service but this has costs

Question 14

What are the benefits of preparing a cash flow forecast

Answer 14

1 allows business to get clear idea of how it is performing now and in future
2 allows managers to be able to specify times when the business may need additional funding
3 identify inconsistencies in future performance can be identified and put right
4 if large input of cash flow is predicted can plan ahead how to use

Question 15

What are the limitations of using cash flow forecasts

Answer 15

1 take up management time that could be used more productively
2 cash flow forecasts need to be accurate this can be difficult to achieve if business has no trading history
3 the longer the timescale the less accurate the forcast will be
4 inflation can impact on accuracy of figures
5 forecasts need to be monitored to have usefullness