Cash Flow

Question 1

Define cash flow

Answer 1

The movement of cash into and out of a business over a period of time

Question 2

Define cash flow forecast

Answer 2

This sets out the anticipated cash inflows and outflows over a set period of time

Question 3

What does a cash flow forecast show ?

Answer 3

It shows the effect on the firms cash balance
(Remember that it’s a prediction/estimate)
Forecasts can later be compared with actual records of cash flow

Question 4

What’s a cash flow statement ?

Answer 4

The actual cash in and cash out of rhe business set over a period of time

Question 5

Why would a firm produce a cash flow statement at the end of the final year ?

Answer 5

Allows you to compare the two
Use cash flow statement to curate cash flow forecast for the next year

Question 6

What are the three key sections of a CFF ( cash flow forecast)?

Answer 6

Cash in
Cash out
Net monthly cash flow

Question 7

Describe cash in

Answer 7

A forecast of cash inflows including receipts from cash and credit sales

Eg selling shares
bank loan
selling assets

Question 8

Describe cash out

Answer 8

A forecast of cash outflow including expenditure on direct costs eg raw materials and indirect costs eg rent

Question 9

How do you calculate net monthly cash inflow

Answer 9

Cash inflow - cash outflow

Question 10

What is the closing balance

Answer 10

The business cash position at rhe end of the time period
Calculated by adding net cash flow to opening balance

Question 11

What is the opening balance

Answer 11

The business cash position at the start of the time period
This will therefore be identical to the closing balance if the previous time oeriod

Question 12

What is a cash flow problem

Answer 12

When cash out is greater than cash in resulting in a negative net cash flow this may(if you have a high opening balance it doesn’t lead to that )lead to a negative closing absence and if this problem is persistent it could lead to bankruptcy (sole trader) or administration (company)

Question 13

Why do firms use CFF?

Answer 13

Can arrange financial cover in advance eg an overdraft

Firm can see problems before rhey arise .it then has time to make improvements

A CFF os required when applying for a loan the bank needs or see that the firm is likely to syrvue and will have enough money to repay loan with interest

Question 14

What are the causes of cash flow problems?

Answer 14

Stockpiling
fall in demand
seasonal product
unexpected events for example strike, machine breakdown
over trading
increased cost of raw material
investing too much in non-current assets
allowing too much credit
timing ofpayments and receipts

Question 15

How does stockpiling cause a cash flow problem?

Answer 15

Excess stock ties up cash, increased risk of stock becoming obsolete, but there needs to be enough stock to meet demand, bulk buying may mean lower purchase prices

Question 16

How does a fall in demand cause a cash flow problem?

Answer 16

May have to decrease selling price – less cash in, less cash but the same cash out

Question 17

Why may a seasonal products cause a cash flow problem

Answer 17

Where they are predictable in demand and cash flow production or purchasing usually in advance of seasonal peak in demand equals cash out flows before inflows this can be managed – cash flow forecast should allow this seasonal changing

Question 18

How does an unexpected event cause cash flow problems?

Answer 18

Cash out – more money to fix machine, lose cash in as you can’t make sales

Question 19

How does overtrading lead to cash flow problems?

Answer 19

Business expands too quickly putting pressure on short-term finance, businesses that rely on long-term contracts also at high risk of overtrading there’s a huge amount of cash going out of the business be waiting for cash to come in

Question 20

How does increase cost of raw material cause cash flow problems?

Answer 20

More cash going out for the same amount of cash going in

Question 21

How does investing too much noncurrent assets cause cash flow problems

Answer 21

Spending too much money so cash out increases

Question 22

How does allowing too much credit cause cash flow problems

Answer 22

Customers who buy on credit or trade debtors, offer credit equals good way of building sales but late payment is a common problem, worse still, the debts may go bad

Question 23

How does the timing of payments and receipts cause cash flow problems?

Answer 23

Timing is a key issue – you need to have enough influence to cover out flows

Payables – amounts of time taken by business to pay supply and other creditors – normally expressed in terms of days

Receivables – amount of time taken by businesses customers to pay for products also expressed in days

Long cash cycle- payments go out before money comes in for example payable =10 days receivables=50 days. 40 days

Question 24

How does poor credit cause cash flow problems?

Answer 24

Haven’t checked if customers can pay credit – cash out higher, less cashing

Question 25

What is the importance of monitoring cash flow?

Answer 25

Monitoring cash flows essential and ongoing element of managing cash flow effectively

spotting issues early allows you to take action.

It’s essential to assess the reasons in order to take the most appropriate action
-one off event for example a cancelled order -seasonal variation
-It’s a trend that’s developing for example falling sales each month.

Question 26

What are the three stages of stock?

Answer 26

Rawmaterials
work inprogress
finish goods

Question 27

How does offering less trade credit/discounts with prompt payment help cash flow problems?

Answer 27

Improves the timing of cashing and reduces the number of receivable days however if offering a discount offer less money per item – amount of customer reduces so less cash in

Question 28

How does debt factoring help improve cash flow problems ?

Answer 28

Used when we have bad debt – ones where customers have defaulted (gone past time) improves the cash in as it speeds it up however amount of cash in is small – debt factor keep some cash

Question 29

How does overdraft/short-term loans help with cash flow problems?

Answer 29

Helps with cash in, gives the flexibility to manage day-to-day bills however you have to pay interest we use overdraft and it’s not a long-term solution

Question 30

How to sales and leaseback help with cash flow problems

Answer 30

Generates cash in,pay to use it each month as your leasing it
However, every month goes out as you don’t own the asset

Question 31

How does not stockpiling improve cash flow problems ?

Answer 31

Reduced cash out as you have less/no stock

X lack flexibility if there’s a surge in demand , raw materials may be more expensive miss out on purchasing economies of scale

Question 32

How does diversify product range improve cash flow problems ?

Answer 32

Improves cash in as there’s a variety of products for range of customers-develop product bring in cash during off season

Paying more for these products -cash out

Question 33

How does growing slowly not rapidly help cash flow problems ?

Answer 33

Stops overtrading -improves cash in and slows cash out don’t have to wait for cash as less cash going out at one time

Cons
May not be gap in market when growing slowly

Missed trends

(Opportunity costs)

Question 34

How does conducing better market redraft to anticipate change help improve cash flow problems ?

Answer 34

Creates more accurate CFF
Better market research is more time consuming and costly and may not be accurate (subject to changes)

Question 35

What problems caused insufficient cash?

Answer 35

With suppliers : if the firm struggles to pay suppliers then supplier may refuse credit on future order

With banks; if they sense a cash flow problem then they may call in the overdraft and can insult on being paid within 24 hours

Question 36

What’s the importance of monitoring cash flow?

Answer 36

Monitoring cash flows essential and ongoing element of managing cash for effectively

spotting issues early allows you take action

it’s essential to access the reasons in order to take the most appropriate action for example one off event seasonal variations is a trend developing e.g. falling sales each month

Question 37

Solutions to cash flow

Answer 37

Improved control of working capital

Ensures firms have enough cash to meet requirements depends on: production process length. Delivery time , credit given to customers

You can improve it by sales and lease back and debt factoring

You can negotiate improved terms for trade credit eg from suppliers

You can try to increase payable days -helps with cash out -slows down cash out due to delay in payments (not always possible )

Negatives-depends on relationship with supplier and miss out on early bird discount

Question 38

Benefits of managing cash flow well

Answer 38

Reduced borrowing costs
-predicting cash flow difficulties and taking action will reduce the need to use overdrafts =lower interest charges for going over agreed limits

Good relationship with suppliers
-as you don’t let let them down
-more likely to pay on time -could receive a discount for this

Public relations
-customers can lose confidence in your ability to meet orders if you have cash flow problems this will only make things worse

Question 39

When is revenue recorded?

Answer 39

When received

Question 40

When is cash recorded?

Answer 40

When received

Question 41

When is fixed cost total variable cost recorded?

Answer 41

At time of purchase

Question 42

When is cash out recorded?

Answer 42

When paid

Question 43

When is profit calculated?

Answer 43

At the end of the financial year on the income statement

Question 44

When is cash flow recorded?

Answer 44

Often usually monthly