Cash Flow

Question 1

What is cash flow ?

Answer 1

Cash flow is money that flows into and out of a business

Question 2

6 Inflows ?

Answer 2

-Cash sales
-Credit Sales
-Loans
-capital introduced
-sale of assets
-bank interest received

Question 3

Inflows - cash sales ?

Answer 3

Cash sales are when the customer pays at the time of the purchase

Question 4

Inflows - credit sales ?

Answer 4

Credit sales are when the customers pays in a pre agreed period after the sale for example 30 days

Question 5

Inflows - Loans ?

Answer 5

Loans are to fund the purchase of assets such as machinery and vehicles

Question 6

Inflows - capital introduced ?

Answer 6

Capital introduced is money invested from entrepreneur’s or shareholders when a business is first set up or looking to expand

Question 7

Inflows - sale of assets ?

Answer 7

Sale of assets are when a business sells assets which are no longer needed

Question 8

Inflows - bank interest received ?

Answer 8

Bank interest received is where interest is paid by the bank on credit balances

Question 9

8 Outflows of a business ?

Answer 9

-Cash purchases
-Credit purchases
-Purchase of assets
-Value added tax (VAT)
-Bank interest paid
-Rent
-Salaries / wages
-Utilities

Question 10

What is a cash flow statement ?

Answer 10

A cash flow statement shows the actual cash inflows and outflows over a period of 12 months produced by limited companies

Question 11

What is a cash flow forecast ?

Answer 11

A cash flow forecast is a prediction of the cash inflows and outflows over a period of time

Question 12

What are some solutions to cash flow issues ?

Answer 12

-Cutting costs
-Increasing selling price
-Reducing stock levels
-selling unused assets - generate cash
-short term cash flow solution eg a loan

Question 13

What are some possible consequences of trying to solve cash flow issues ?

Answer 13

-Poorer quality
-Less sales
-need of new assets due to selling some
-poor credit score meaning high interest rates

Question 14

Benefits of using a cash flow forecast ?

Answer 14

-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

Question 15

Limitations of using a cash flow forecast ?

Answer 15

-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

Question 16

What is break even ?

Answer 16

Break even is the point at which a business is not making a profit or a loss

Question 17

What are the 3 categories of cost ?

Answer 17

-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

Question 18

What is margin of safety ?

Answer 18

The margin of safety is the difference between forecasted or actual sales and the breakeven output

Question 19

What are the 4 uses of Breakeven ?

Answer 19

-Planning
-Monitoring
-Control
-Target setting

Question 20

Explain use of breakeven - planning ?

Answer 20

Planning
-sets budgets for amount of sales necessary and costs
-forms a part of the business plan
-informs pricing decisions

Question 21

Explain use of breakeven - monitoring ?

Answer 21

Monitoring
-monitors progress towards achieving breakeven point
-identifies changes to selling price or costs
-take corrective action if targets are not met

Question 22

Explain use of breakeven - control ?

Answer 22

Control
-keep costs within the budget
-motivate employees
-manage sale accounts

Question 23

Explain use of breakeven - target setting ?

Answer 23

Target setting
-set sale targets for individual employees or team products
-set expenditure budgets
-set profit budgets

Question 24

What are some advantages of using breakeven ?

Answer 24

-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

Question 25

What are some disadvantages of using breakeven ?

Answer 25

-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

Question 26

What are ways that business can improve their breakeven point ?

Answer 26

-increase selling price
-find a cheaper supplier so can reduce variable costs
-reduce fixed costs eg rent
-reduce other costs

Question 27

What are possible consequences of a business trying to improve their breakeven point ?

Answer 27

-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