Cash Flow Flashcards
What is cash flow ?
Cash flow is money that flows into and out of a business
6 Inflows ?
-Cash sales
-Credit Sales
-Loans
-capital introduced
-sale of assets
-bank interest received
Inflows - cash sales ?
Cash sales are when the customer pays at the time of the purchase
Inflows - credit sales ?
Credit sales are when the customers pays in a pre agreed period after the sale for example 30 days
Inflows - Loans ?
Loans are to fund the purchase of assets such as machinery and vehicles
Inflows - capital introduced ?
Capital introduced is money invested from entrepreneur’s or shareholders when a business is first set up or looking to expand
Inflows - sale of assets ?
Sale of assets are when a business sells assets which are no longer needed
Inflows - bank interest received ?
Bank interest received is where interest is paid by the bank on credit balances
8 Outflows of a business ?
-Cash purchases
-Credit purchases
-Purchase of assets
-Value added tax (VAT)
-Bank interest paid
-Rent
-Salaries / wages
-Utilities
What is a cash flow statement ?
A cash flow statement shows the actual cash inflows and outflows over a period of 12 months produced by limited companies
What is a cash flow forecast ?
A cash flow forecast is a prediction of the cash inflows and outflows over a period of time
What are some solutions to cash flow issues ?
-Cutting costs
-Increasing selling price
-Reducing stock levels
-selling unused assets - generate cash
-short term cash flow solution eg a loan
What are some possible consequences of trying to solve cash flow issues ?
-Poorer quality
-Less sales
-need of new assets due to selling some
-poor credit score meaning high interest rates
Benefits of using a cash flow forecast ?
-Encourages planning for cash inflows and outflows
-enables cash flow to be monitored and corrective action to be taken if necessary
-identifies in advance times of negative closing balances allowing the business to plan for these
Limitations of using a cash flow forecast ?
-based on forecasts and therefore may be inaccurate
-cannot plan for unexpected events such as rise in the cost of raw materials
-time taken to produce a cash flow forecast could have been spent on other tasks
What is break even ?
Break even is the point at which a business is not making a profit or a loss
What are the 3 categories of cost ?
-Fixed costs - do not change / vary with output eg rent and salaries
-variable costs - vary with the level of output eg wages , raw materials
-semi variable costs - part of the cost stays the same and part varies in relation to the degree of business activity eg a worker may be paid at a fixed rate of pay but earns additional payments for overtime
What is margin of safety ?
The margin of safety is the difference between forecasted or actual sales and the breakeven output
What are the 4 uses of Breakeven ?
-Planning
-Monitoring
-Control
-Target setting
Explain use of breakeven - planning ?
Planning
-sets budgets for amount of sales necessary and costs
-forms a part of the business plan
-informs pricing decisions
Explain use of breakeven - monitoring ?
Monitoring
-monitors progress towards achieving breakeven point
-identifies changes to selling price or costs
-take corrective action if targets are not met
Explain use of breakeven - control ?
Control
-keep costs within the budget
-motivate employees
-manage sale accounts
Explain use of breakeven - target setting ?
Target setting
-set sale targets for individual employees or team products
-set expenditure budgets
-set profit budgets
What are some advantages of using breakeven ?
-the business will know how many items it must sell in order to break even
-able to calculate profits and loss at different levels of output
-inform decisions on what prices to charge
-margin of safety is known
-can set targets
-identifies fixed and variable costs
What are some disadvantages of using breakeven ?
-uses forecasted figure so may not be accurate
-doesn’t take into account unexpected changes such as cost of raw materials increasing
-targets set using breakeven may be too high or unachievable
What are ways that business can improve their breakeven point ?
-increase selling price
-find a cheaper supplier so can reduce variable costs
-reduce fixed costs eg rent
-reduce other costs
What are possible consequences of a business trying to improve their breakeven point ?
-high selling price - leads customers to go to competitors
-cheaper supplier and reducing variable costs - poor quality, not cheaper suppliers available
-reduce fixed costs - rent , location - not suitable , staff - minimum wage
-reduce other costs - reducing costs like utilities may only have limited impact on overall costs
