Cash - flow; finance Flashcards
Why is cash - flow important to a business (5)
- Cash is the lifeblood of a business
- If a business runs out of cash it will almost certainly fail
- Few small businesses have unlimited finance - cash is limited, so it needs to be managed carefully
- To pay suppliers, overheads and employees
- To prevent business failure
Difference between cash and profit (3)
- Profits are the main source of funds for an established business
- Revenues eventually turn into cash inflows
- Costs eventually turn into cash outflows
How is profit recorded
Profit is recorded when sale is made, whereas, cash is recorded when it is received.
Cash - flow -
Net cash - flow -
-the process of cash flowing in and out of a business
-the difference between cash inflows and cash outflows over a trading period
Cash inflows (3)
Cash sales
Loan receives
Capital introduced
Cash outflow (3)
Rent
Wages
Marketing campaign
Why is cash-flow forecast important (5)
- Identifies potential shortfalls in cash balances in advance
- Ensures the business can afford to pay suppliers and employees
- Helps to spot problems with customer payments
- Important part of financial planning
- External stakeholders, such as banks, may require a regular forecast
Net cash flow:
Opening balance:
Closing balance:
=total cash inflows - total cash outflows at a given period
=closing balance of a previous period
=opening balance + net cash - flow
Common problems with cash - flow forecasts (4)
- Sales lower than expected (easy to be over - optimistic/market research may have gaps)
- Customers do not pay up on time (a notorious problem for small businesses)
- The cost of production proves higher than expected (might be due to business operating inefficiently)
- Certain costs are not included (unexpected costs)
Cash-flow uses (3)
- To help obtain loans since lenders can see how much flows into
- Can decide what they want to do with any excess cash
- Spot problems before they happen and make changes
How to increase sales (3)
Improved marketing
Better products
Decrease prices of items sold
How to increase cash - flows (3)
- Reduce trade credit to customers
- Offer an incentive/reward - delivery or discount
- Chase up late payments
How to reduce outflows (3)
- Lease rather than buy - rent equipment
- Reduce materials and stock - like stocks for shoes, more efficient stocks
- Delaying paying invoice - buying you time
Internal sources of finance-
External sources of finance-
-finance which is raised, it does not increase the debt of the business
-finance provided by people or institutions outside the business, creates a debt that will require payment
Short-term finance solutions (2)
Overdraft
Trade credit
Long-term finance solutions (6)
Personal savings
Loan (bank/friends and family)
Share capital
Venture capital
Crowd funding
Retained profit
Personal savings benefits (4) and drawbacks (2)
-your own money that you have saved
Benefits:
1. Cheap
2. Quick
3. Convenient
4. Do not need to pay back
Drawbacks:
1. The owner might not have enough
2. May need cash for personal use
Loan (friends and family) benefits (2) and drawbacks (2)
-borrowing money that you will need to pay back
Benefits:
1. More flexible payments
2. Less interest rate
Drawbacks:
1. Ruin relationship
2. Need to pay back
Loan (banks) benefits (3) and drawbacks (2)
-borrowing money from the bank that you pay back in a set period of time with interest rate
Benefits:
1. Provides immediate money
2. Can borrow more
3. Can be payed in small amount of money over long period of time -> spread costs
Drawbacks:
1. Needs to be payed back
2. Interest rates payments on top of that
Share capital benefits (2) and drawbacks (2)
-amount of money the owners of a company have invested in the business as represented by common and/or preferred shares
Benefits:
1. No personal responsibility
2. No interest applied
Drawbacks:
1. Profits is going to share holders
2. Less income
Venture capital benefits (3) and drawbacks (2)
-professional investors that would put a large amount of money in business (usually high - risks), giving also advice and experience
Benefits:
1. Good advice/support
2. Immediate budget provided
3. Less risks
Drawbacks:
1. Usually requires giving a big shares to the investors
2. Less control in making decisions
Crowd funding benefits (2) and drawbacks (2)
-enables fundraisers to collect money from a large number of people via online platforms
Benefits:
1. No need to pay back
2. Easy to collect
Drawbacks:
1. Could take a lot of time to collect set amount of money
2. High competition
Retained profit benefits (3) and drawbacks (1)
-profits held back in the business for reinvestment rather than being spend
Benefits:
1. Fast
2. Cannot cause debt
3. Easy access
Drawbacks:
1. When the money are gone that are not available for future problems
Bank overdraft benefits (2) and drawbacks (3)
-borrowing money from the bank, spending more money that you have on your card
Benefits:
1. Immediate money
2. Short-term easy solution
Drawbacks:
1. High interest rate
2. Need to pay back
3. Set amount of money that you can borrow
Trade credit benefits (1) and drawbacks (2)
-provided by a firm’s suppliers, allowing the business to have the goos now and pay later
Benefits:
1. Can use the goods before paying allowing to increase sales and cash flow
Drawbacks:
1. Business might fail -> not able to pay
2. Bad reputation if not paid on time
Internal sources of finance (5)
- Retained profit
- Personal savings
- Sale of stock
- Debt collection
- Owner’s investment
External sources of finance (7)
- Loans
- Overdraft
- Share capital
- Trade credit
- Crowd funding
- Venture capital
- Leasing (rent instead of buy)
