Cash flow and break even

Question 1

What is cash flow forecast?

Answer 1

a document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months.

Question 2

What are cash inflows and receipts? give examples

Answer 2

the money coming into the business from various sources includes cash sales - credit sales- p-loans and -sale of assets

Question 3

What is the formula to calculate closing balance?

Answer 3

opening balance+ cash inflows-cash outflows= closing balance.

Question 4

What are cash outflows or payments? And give examples.

Answer 4

The money going out of the business for various purposes such as- cash purchase - credit purchase- purchase of assets- and bank interest paid.

Question 5

What is liquidity?

Answer 5

Measures a firms ability to meet short-term cash payments.

Question 6

What is credit period?

Answer 6

The length of time given to customers to pay for goods or services received.

Question 7

What does the term insolvent mean?

Answer 7

When a firms unable to meet short term cash payments.

Question 8

List 2 benefits of cash flow forecast?

Answer 8

• Encourage planning
• Enables cash flow to be monitored
• used as part of a business plan to help raise finance
• identifies in advance times of negative closing balances

Question 9

What are the problems with the cashflow forecast?

Answer 9

Problems occur when the businesses outflows are greater than the opening balance + the inflows as this will result in a negative closing balance. This means the business will not have enough funds to pay off debts.

Question 10

Name three solutions to cashflow problems? and explain each

Answer 10

Overdraft arrangements- a business with a fluctuating cash flow cycle should be able to shopw the bank sop an extra overdraft facility can be made to help the business through this period.

Negotiating terms with creditors- creditors are people the business owes money to. A business with cash flow issues could try to negotiate a longer payment with the creditor.

Reviewing and reshceduling capital expenditure- having identified the cash flow issue the manager could identify what the cash outflows were being spent on hence being able to cut down on unnecesary expenditure.

Question 11

What is retained profit?

Answer 11

The net income you make after tax

Question 12

What is the difference between the cash inflows and outflows during a specific period of time?

Answer 12

net cash flow

Question 13

Why is cash flow forecasting important for a startup business?

Answer 13

• identify potential shortfalls in cash balance in advance.

- make sure that the business can afford to pay

Question 14

What are some benefits of cash flow?

Answer 14

Encourages planning
Enables cash flow to be monitored and corrective action taken if necessary
Can be used as part of a business plan to help raise finance
Identify in advance times of negative closing balances

Question 15

Name some limitations of cash flow forecast?

Answer 15

• may be inaccuratee
• Cannot plan for unexpected events
• Time taken to produce a cash flow forecasts

Question 16

What is break even?

Answer 16

Is the point at which a business is not making a profit or loss.

Question 17

What are the categories of costs to a business?

Answer 17

• Variable costs- vary with level of output
• semi variable- part of the cost stays the same and part varies in relation to the degree of business activity.
• fixed costs- do not vary with output for example rent
• total costs- fixed costs + variable costs

Question 18

What is total revenue?

Answer 18

The total amount of money coming in from sales, calculated as quantity sold multiplied by selling price.

Question 19

What does the term mean total sales?

Answer 19

The amount of sales made in a set period for example a year this can be expressed as value or volume.

Question 20

What does the term selling price per unit mean?

Answer 20

The amount a customer pays for each unit bought.

Question 21

What does the term sales in volume mean?

Answer 21

Sales expressed as a quantity for example tons or units

Question 22

What does the term sales in value mean?

Answer 22

• sales expressed in monetary value for example £s calculated as quantity sold multiplied by selling price per unit.

Question 23

What is break even?

Answer 23

total revenue=total costs

Question 24

How do you calculate break even?

Answer 24

Break even point+ fixed costs/contribution per unit

Question 25

What are the 4 things break even can be used for?

Answer 25

Planning
Monitoring
Control
Target setting

Question 26

Name some advantages of break even?

Answer 26

• The business knows how many items it must sell in order to break-even
• Can set targets
• Identifies fixed and variable costs
• Can identify ways a business can lower costs
• Easy way to calculate profit or loss.