cash flow Flashcards
define cash flow
all of the tangible cash doing into and out of the business
Money (in cash) payments made by the business (outflows) and received by the business (inflows).
as we know cash is the most liquid asset, thus cash flow refers to….
how to calculate net cash flow
cash inflows - outflows
*always this order!!
cumulative cash flows are the cfs added up.
define cash inflow
the money in ‘cash’ that the company earns from its main operations and other revenue sources, such as the sale of unused fixed assets
define cash outflow
the ‘cash’ money the company pays for its operations and other irregular expenditure, such as legal fees.
what is a cash flow forecast and what is the structure
top from left to right its the months
1. opening balance
2. cash inflows
2.1 sales r
2.2 debtors
2.3 etc
3. total cash inflows
4. cash outflows
4.1 creditors
4.2 rent
4.3 wages
4.4 utilities/packaging
4.5 etc
5. total cash outflows
6. net cash flow
7. closing balance (which is the opening balance for the next month.
*A prediction of future cash inflows, cash outflows and net cash flow for a specific time period. - usually a month.
*A cash flow statement records the actual cash inflows and cash outflows that took place in the period. This is usually tabled alongside the income statement and balance sheet
who can see the cash flow forecast
businesses usually haver an option to post the forecast or not same w the statement.
what is the relevance of calculating net cash flow - formula
Financial Health Assessment: entity’s ability to meet its financial obligations in the short term.
Investment Decision Making: Helps investors evaluate the attractiveness of an investment by assessing its ability to generate positive cash flows.
Budgeting and Planning: plan budgets accordingly.
Assists in determining if a company can cover interest payments and repay debts.
Operational Efficiency: Highlights areas where cash is generated or consumed, aiding in operational improvements.
Risk Management: Identifies potential liquidity issues and allows for proactive risk mitigation strategies.
comparison w industry standards n shit
what are the advantages and disadvantages of the cash flow forecast?
+: plan in advance and make snap decisions at that time, managers can use cash flow to prepare a Gantt chart to handle business operations.
+: The business can compare the cash flow forecast and the actual cash flows for the period to help with budgeting and marketing decisions for the future. company can implement new advertising strategies for the following year.
explain the relationship between investment profit and cash flow
investment is the purchase of a fixed asset also known as capital expenditure.
Inv requrires a large initial cash payment, which could have a neg impact on the business cash flow in the short term, but may have a more positive impact in the long term.
ALSO: Managers and investors often track free cash flow, or the cash that is left over once operational costs have been paid. Having excess free cash flow allows public companies to buy back their own shares or distribute to investors.
recommend strategies for dealing with cash flow issues, what business tools could you use?
increasing inflow:
1. good debt collection and increased promotions - set up timelines, email, discounts for ppl that pay on time or whatever, reducing prices (may impact cash inflow in long term maybe or revenue) frequently - may discourage further credit payments and cause business customer conflict.
2. cash transactions only - the company may lose some good customers who can only buy on credit.
3. expanding product portfolio - diversifies risk and increases the revenue or cash inflow - investing in new products will require cash outflows in the short term, with the hope of more sales and therefore higher cash inflows in the future.
4. sell assets.
5. loans
6. overdrafts - if insolvent
reducing outflow:
1. stock management JIT efficient but - business becomes over reliant on the speed with which suppliers fill the orders. (reducing the amount of cash tied up in stock).
2. cheaper suppliers.
3. leasing
4. reduce expenses
define net cash flow
you could think of it as left over cash in the business.
difference between the total cash inflows and cash outflows. It could be positive or negative.
diff between profit and cash flow
Profit is revenue (which may or may not be full in cash) minus costs. Cash flow refers to the actual movement of funds in and out of the business. It is therefore possible for a profitable business to become insolvent or bankrupt.
remember that profit refers to the accounting records, while cash flow and sufficient cash is related to the planning and ensuring that payments are made on time.
what is working capital and how to calc?
Working capital refers to the funds available in the business to meet the needs of its day-to-day operations.
WC = current A’s - current L’s
how does the working capital cycle look like
cash —-> (purchase of supplies) creditors —–> (production) stock —> (sale of good) —-> debtors (customers)
what is opening and closing balance?
OB: the amount of cash the business has in the bank at the beginning of the month. If a business is new, then it will not have an opening balance, so this figure would be zero.
CB: amount of cash that the business has at the end of the month. It is the sum of the opening balance and the net cash flow. This closing balance then becomes the opening balance for the next month. This is calculated using the following formula:
