Cash Flow

Question 1

What is cashflow?

Answer 1

• The money going in and coming out of a business.

Question 2

What is the formula for cashflow?

Answer 2

CASHFLOW = INFLOWS - OUTFLOWS

Question 3

What do cashflow forecasts show?

Answer 3

• Predictions for the cash inflows and cash outflows for a business.

Question 4

How do cashflow forecasts help businesses?

Answer 4

Allows the business to take measures to make sure that cash is available when needed, based on inflows and ouflows.

Question 5

What is net cash flow?

Answer 5

The difference between the monthly inflows and monthly outflows.

Question 6

What is the opening balance on a cash flow forecast?

Answer 6

The amount of cash carried forward from the previous month/trading period.

Question 7

How can the closing balance be calculated on a cashflow forecast?

Answer 7

By using the following formula:

CLOSING BALANCE = NET CASH FLOW + OPENING BALANCE

Question 8

Why should a business construct a cash flow forecast?

Give at least two reasons.

Answer 8

At least two from:

• it is used to support the application for a loan
• it supports the budgeting process.
• it identifies any potential cash flow crisis.

Question 9

What are trade payables?

Answer 9

The amount of time taken (days) for the business to pay it’s creditors.

Question 10

What are trade receivables?

Answer 10

The amount of time taken for debtors (customers) to pay the business.

Question 11

How could the business overcome cash flow issues should they arrive?

Answer 11

• Ask for their trade receivables to be paid back sooner.
• Ask to pay their trade payables back later than first agreed.
• Try to reduce running costs i.e. find cheaper suppliers.

Question 12

What could be the potential problem with paying suppliers later than first agreed?

Answer 12

• The supplier may not want to supply the business with stock in the future if they cannot pay for the goods at the time first agreed.

Question 13

Why do businesses use cashflow forecasts?

Give at least two reasons.

Answer 13

At least two from:

• Identify potential shortfalls in cash balances – for example, if the forecast shows a negative cash balance then the business needs to ensure it has a sufficient bank overdraft facility.
• See whether the trading performance of the business (revenues, costs and profits) turns into cash.
• Analyse whether the business is achieving the financial objectives set out in the business plan (which will almost certainly include some kind of cash flow budget)

Question 14

What are the reasons why a cash flow forecast is so important?
Give at least two examples.

Answer 14

• Identifies potential shortfalls in cash balances in advance.
• Makes sure that the business can afford to pay suppliers and employees.
• Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts.
• Important discipline of financial planning.
• External stakeholders such as banks may require a regular forecast. Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals.

Question 15

Give at least three examples of the potential causes of cashflow problems.

Answer 15

At least three from:

• Inaccurate cashflow management.
• Poor credit control.
• Overtrading
• Unforeseen costs
• Allowing too much trade credit to customers.

Question 16

Give at least two examples of ways to improve cashflow by speeding up inflows.

Answer 16

At least two from:

• Incentivise early payment - give customers a discount for paying back early.
• Reduce trade credit given to customers.
• Sell of stock at a discounted price to free up cash.
• Inject fresh capital into the business.

Question 17

Give at least two examples of ways to improve cashflow by slowing down outflows.

Answer 17

At least two from:

• Delay payments to suppliers.
• Increase trade credit agreements with suppliers.
• Cut costs - find cheaper alternatives or postpone spending in areas such as training or advertising.

Question 18

Give at least three examples of the ways to increase revenue.

Answer 18

At least three from:

• Increase prices
• Create awareness and desire to purchase products through marketing.
• Add value to the product - increase benefits and features of the products.

Question 19

Give at least three examples of the ways to reduce costs.

Answer 19

At least three from:

• Reduce production costs
• Improve business efficiency.
• Eliminate unprofitable processes - such as unprofitable profit lines.
• Reduce variable costs - negotiate better deals with suppliers.
• Lower overheads - move to a cheaper location.