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Theme 1 investigating small business > Cash - flow; finance > Flashcards

Cash - flow; finance Flashcards

1
Q

Why is cash - flow important to a business (5)

A
  1. Cash is the lifeblood of a business
  2. If a business runs out of cash it will almost certainly fail
  3. Few small businesses have unlimited finance - cash is limited, so it needs to be managed carefully
  4. To pay suppliers, overheads and employees
  5. To prevent business failure
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2
Q

Difference between cash and profit (3)

A
  1. Profits are the main source of funds for an established business
  2. Revenues eventually turn into cash inflows
  3. Costs eventually turn into cash outflows
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3
Q

How is profit recorded

A

Profit is recorded when sale is made, whereas, cash is recorded when it is received.

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4
Q

Cash - flow -
Net cash - flow -

A

-the process of cash flowing in and out of a business
-the difference between cash inflows and cash outflows over a trading period

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5
Q

Cash inflows (3)

A

Cash sales
Loan receives
Capital introduced

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6
Q

Cash outflow (3)

A

Rent
Wages
Marketing campaign

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7
Q

Why is cash-flow forecast important (5)

A
  1. Identifies potential shortfalls in cash balances in advance
  2. Ensures the business can afford to pay suppliers and employees
  3. Helps to spot problems with customer payments
  4. Important part of financial planning
  5. External stakeholders, such as banks, may require a regular forecast
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8
Q

Net cash flow:
Opening balance:
Closing balance:

A

=total cash inflows - total cash outflows at a given period
=closing balance of a previous period
=opening balance + net cash - flow

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9
Q

Common problems with cash - flow forecasts (4)

A
  1. Sales lower than expected (easy to be over - optimistic/market research may have gaps)
  2. Customers do not pay up on time (a notorious problem for small businesses)
  3. The cost of production proves higher than expected (might be due to business operating inefficiently)
  4. Certain costs are not included (unexpected costs)
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10
Q

Cash-flow uses (3)

A
  1. To help obtain loans since lenders can see how much flows into
  2. Can decide what they want to do with any excess cash
  3. Spot problems before they happen and make changes
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11
Q

How to increase sales (3)

A

Improved marketing
Better products
Decrease prices of items sold

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12
Q

How to increase cash - flows (3)

A
  1. Reduce trade credit to customers
  2. Offer an incentive/reward - delivery or discount
  3. Chase up late payments
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13
Q

How to reduce outflows (3)

A
  1. Lease rather than buy - rent equipment
  2. Reduce materials and stock - like stocks for shoes, more efficient stocks
  3. Delaying paying invoice - buying you time
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14
Q

Internal sources of finance-
External sources of finance-

A

-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

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15
Q

Short-term finance solutions (2)

A

Overdraft
Trade credit

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16
Q

Long-term finance solutions (6)

A

Personal savings
Loan (bank/friends and family)
Share capital
Venture capital
Crowd funding
Retained profit

17
Q

Personal savings benefits (4) and drawbacks (2)

A

-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

18
Q

Loan (friends and family) benefits (2) and drawbacks (2)

A

-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

19
Q

Loan (banks) benefits (3) and drawbacks (2)

A

-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

20
Q

Share capital benefits (2) and drawbacks (2)

A

-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

21
Q

Venture capital benefits (3) and drawbacks (2)

A

-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

22
Q

Crowd funding benefits (2) and drawbacks (2)

A

-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

23
Q

Retained profit benefits (3) and drawbacks (1)

A

-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

24
Q

Bank overdraft benefits (2) and drawbacks (3)

A

-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

25
Q

Trade credit benefits (1) and drawbacks (2)

A

-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

26
Q

Internal sources of finance (5)

A
  1. Retained profit
  2. Personal savings
  3. Sale of stock
  4. Debt collection
  5. Owner’s investment
27
Q

External sources of finance (7)

A
  1. Loans
  2. Overdraft
  3. Share capital
  4. Trade credit
  5. Crowd funding
  6. Venture capital
  7. Leasing (rent instead of buy)

Theme 1 investigating small business (11 decks)

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