cash flow forecasting

Question 1

what is cash flow

Answer 1

the sum of cash payment to a business less the sum of cash payements from the business

Question 2

insolvent

Answer 2

when a business cannot meet its short-term debts

Question 3

cash flow forecast

Answer 3

an estimate of the future cash inflows and outflows of a business

Question 4

why is it important for new businesses

Answer 4

-banks and other lenders will need to see evidence of a cash flow forecast before giving finance
-new business start-ups are often offered much shorter credit to pay suppliers than larger firms
- helps with planning and foresight since money is tight in the beginning

Question 5

cash inflows

Answer 5

cash payments into a business

Question 6

examples of cash inflows

Answer 6

owners own capital injection
-bank loan payments
-customers cash purchases(requires sales forecast)
-trade receivables payments

Question 7

cash outflows

Answer 7

cash payments out of a business

Question 8

examples of cash outflows

Answer 8

annual rent payment
-utility bills
-wage payments
-cost of materials

Question 9

opening cash balance

Answer 9

cash held by a business at the start of the month

Question 10

closing cash balance

Answer 10

cash held by the business at the end of the month, which becomes next months opening balance

Question 11

benefits of cash flow forecasting

Answer 11

-the show negative cash flows (plans for addition finance can be made)
-business can plan to improve cash flow by identifying areas of excessive -ve cash flow
-essential for all business plans

Question 12

limitations of cash flow forecasting

Answer 12

-mistakes can be made in preparing revenue and cos forecasts
-unexpected cos increases leads to inaccuracies
-incorrect assumptions could be made (possibly due to poor market research)

Question 13

causes of cash flow problems

Answer 13

-lack of planning( can lead to inaccuracies)
-poor credit control (leads to inaccuracies in trade
receivables)
-expanding too rapidly (overtrading)
-unexpected events (cost increase/ breakdowns etc)
-allowing customers to long to pay debts (reduces short-term cash inflows)

Question 14

credit control

Answer 14

monitoring of debts to ensure that credit epriods are not exceeded

Question 15

bad debt

Answer 15

unpaid customers bills that are now very unlikely to ever be paid

Question 16

overtrading

Answer 16

expanding a business rapidly without obtaining all the necessary finance, resulting in a cash flow shortage

Question 17

methods of increasing cash inflows (disadv- same as sources of finance)

Answer 17

overdraft
-short-term loan
-sale of assets
-sale and leaseback
-manage trade recievables

Question 18

methods of reducing cash outflows

Answer 18

delay capital expenditure
-use leasing instead of buying
-cut overhead costs that don’t directly affect output (eg. promotional expenditure)
-manage trade payables

Question 19

how to improve cash inflows with trade receivables

Answer 19

-not extending credit to customers or asking them to pay more quickly (may decrease customers)

-selling trade receivables to debt factors (take a portion)

-finding out whether new customers are creditworthy (use banks, other traders to find out)

-offering a discount to customers who pay promptly (reduce profit margin)

Question 20

what is delaying capital expenditure + drawbacks

Answer 20

by not buying equipment, vehicles cash won’t have to paid to suppliers

-ves: - efficiency may fall if inefficient equipment isn’t replaced
-expansion becomes difficult

Question 21

what does cutting overheads work + drawbacks

Answer 21

these costs will not reduce production capacity and cash outflows will be reduced.

-ve: -future demand may fall by not promoting the product

Question 22

improving cash outflows by managing trade payables

Answer 22

-purchasing more supplies on credit (some suppliers may refuse, discounts from suppliers may stop)

-extend the period of time taken to pay (suppliers may be reluctant to supply or offer a good service in the future)