Cash Flow Flashcards
What is the difference between Cash and Profit?
Cash is the money a company can spend immediately, profit is the amount of money a company earns after costs have been taken into account.
What is Cash Flow?
The flow of all money into and out of the business.
What is Cash inflow?
When a firm sells its products, money flows in.
What is Cash Outflow?
When a firm buys materials or pays wages, money flows out.
What is Net cash flow?
The difference between Cash inflow and Cash outflow over a period of time.
If a company has positive cash flow…
then there is more cash inflow than cash outflow for a particular time period.
Positive cash flow may also mean that the company is losing opportunites to invest…
in ways that might improve it.
What is good about a Cash flow forecast?
A good way of predicting when a firm might face a liquidity problem.
What does a Cash flow forecast do?
List all the inflows and outflows of cash that appear in the budget.
Why does the forecast need to be watched carefully?
To monitor what the impact of unexpected cash flows might be.
What do Credit terms do?
Tell you how long after agreeing to buy a product the customer has to pay.
What does poor cash flow mean?
There is not enough cash in a business to meet its day-to-day expenses.
If staff do not get paid on time what will this cause?
Resentment and poor motivation
What may happen if Creditors do not get paid on tme?
May insist on stricter credit terms in future.
Explain why Poor sales can be a reason for poor cash flow?
Lack of demand from consumers for the firm’s products, so the firm has less money coming in and it cannot pay its creditors.
Explain how Overtrading can be a reason for Poor cash flow.
Firms takes on too many orders - as a result it buys too many raw materials and hires too many staff.
Something goes wrong with orders and the firm doesn’t get the money from its customers quickly enough to pay its debts.
What is the other reason for poor cash flow and what is it usually caused by?
Poor business decisions
Caused by not doing enough planning or market research.
What are the two ways business could reschedule payments to improve cash flow?
They could give their customers less generous credit terms or insist they pay immediately.
They could try to reschedule payments they make to their suppliers. Could include negotiating better credit terms.
How can a business reduce cash outflow to improve cash flow?
Could simply sell their stocks of unsold products instead of making more. Cash inflows will be the same but cash outflows will be reduced.
What are 3 other ways business can improve cash flow?
(Other than Rescheduled payments and Reducing cash outflow)
Overdrafts
New sources of finance
Increasing cash inflow
