Cash Flow Flashcards
What is an inflow?
Money received by the business
Name 4 examples of inflows
Bank loans, sales revenue, rents from property the business owns, share capital invested by the owners
What is another name for an inflow?
Receipt
What is an outflow?
Money going out of the business
Name 4 examples of outflows
Advertising, staff wages, raw materials, insurance and business rates
What is another name for an outflow?
Payment
What are 2 advantages of completing a cash flow forecast?
The business will know in ADVANCE the flow of the cash through the business. If cash levels are LOW at any point , the business can take action promptly.
How do you calculate net inflows/outflows?
Inflows - outflows
What is the opening balance?
The money in the bank account at the start of the month
How do you calculate the closing balance?
Opening balance + net inflows/outflows
What is a cash transaction?
When private customers buy products and pay immediately for them
What is a credit transaction?
The business has to wait for payment.
How can a business improve inflows?
Send out invoices promptly, chase up late payments, avoid giving credit to unknown customers, give discounts for early payments.
How can a business manage outflows?
Delay some payments, reduce stock levels, delay a big project, make cutbacks to reduce expenditure
Veronica makes designer Christmas crackers. She sells to stores on a credit basis. In August she has a cash flow problem. What 2 actions could she take to improve her cash flow?
Sell online on a cash basis
Reduce her expenditure
If you are owed £5000 from a customer and without the money you will have cash flow problems what 2 actions could you take to manage your finances?
- Phone the customer and chase up the money
- Offer a small discount for immediate payment
- Ask the bank for a temporary overdraft
What are the benefits of cash flow forecasting?
The timings of inflows and outflows is known
Possible problems are spotted quickly
Surplus cash can be invested
Expensive items can be bought at the best time
The business can plan to expand or reduce activities
What are short-term problems a business might encounter with their cash flow? What solutions can be found?
Delayed payments from customers - chase up late payment
Lots of bills arriving at the same time - renegotiate payment dates
A large emergency payment - obtain a temporary loan
What are the risks of not completing cash flow?
Late inflows from customers might not be identified
There may not be enough cash to pay bills or wages
Suppliers may refuse to trade with the business if they have a reputation for non-payment
A costly emergency loan or overdraft might be needed
The business may run out of money and have to cease trading
What are some long-term problems a business might have? What action could be taken to resolve it?
Too little revenue - increase sales with a special offer or new product launch
Expenditure it too high - reduce costs , look for a cheaper supplier
Costs keep rising steadily - reduce costs, look for a cheaper supplier
Reece considers a cash flow forecast to be unnecessary because people pay him on delivery. Why is this a risky attitude to have?
All businesses need to forecast. Reece might not have enough money to pay his own bills. If the business was quiet for a few weeks or there was an emergency payment Reece could struggle. Unless he has allowed for this expenditure he would have to take out a loan or overdraft to pay for it or temporarily stop trading.
If the closing balance is getting bigger each month suggest one way the business can better manage their finances.
The business may benefit from putting some money into a savings account to earn interest
