Cash Flow Forecasting Flashcards
what is cash flow?
the movement of cash into and out of a business over a period of time and shows how much cash is available in a business
what are the 5 key terms related to a cash flow forecast and give their definitions?
receipts -
cash inflow/sales revenue/turnover
money received through cash/credit sales
credit sales should be in the month that payments are forecast to be received not when the initial sale occurred
payments -
cash outflow/expenditure/expenses
money leaving the business
net cash flow -
difference between total inflow and total outflow
the figure could be negative
formula is total receipts - total payments
opening balance -
money contained in the firm’s bank account at the start of the month/closing balance from previous month
closing balance -
money in the firm’s bank account at the end of the month
calculated by adding net monthly cash flow to the opening balance for the corresponding month (net cash flow + opening balance)
if net cash flow is negative than the opening balance - net cash flow
what are three factors that can cause poor cash flow and expand on each one?
sales not at expected level due to -
increased/decreased competition
economic growth/decline
changing spending patterns of consumers/fashions
government influences like increased/decreased taxation
increased costs -
raw materials cost increases
higher than expected level of inflation
increased interest rates
increased labour costs
internal factors -
poor initial predictions of income and expenditure
late payment to debtors
poor budgeting and lack of control of spending
define cash deficit
occurs when the closing balance is negative meaning a business doesn’t have sufficient cash to meet its payments
define cash surplus
occurs when the closing balance is positive meaning business has more cash than they need to cover their payments
what are 9 methods to improve cash flow?
arrange a bank overdraft
increase the selling price of products
spread payments equally over the year
delay purchases of expensive capital equipment
reduce fixed costs
buy cheaper raw materials
pay suppliers on trade credit
reduce trade credit terms offered
extra funding
explain and evaluate arranging a bank overdraft
exp -
useful when business has fewer sales/high expenses
quick and easy to arrange and can be short/long term
eva -
not all businesses eligible
can carry high interest rates
explain and evaluate increase selling price of products
exp -
business generate more cash from each sale
eva -
businesses in competitive markets may not able to or else consumers will switch competitors
explain and evaluate spread payments equally over a year
exp -
paying in installments means businesses will not have irregular cash flow that could lead to cash deficit
eva -
could lead to paying more overall because of interest and suppliers aren’t receiving all cash upfront
explain and evaluate delaying purchases of expensive capital punishment
exp -
if business has poor cash flow, it can put off buying expensive equipment until it has a surplus
eva -
depends on whether capital purchases are essential
explain and evaluate reduce fixed costs
exp -
some overhead costs could be reduced by finding a cheaper supplier for electricity/renting cheaper premises
eva -
may reduce the quality of goods offered and impact customer loyalty
explain and evaluate buying cheaper raw materials
exp -
can save business money in short term however depends of quality remains the same
eva -
can damage reputation
explain and evaluate paying suppliers on trade credit
exp -
delay payment by purchasing supplies and materials on credit by a month or more
eva -
can damage relationship with suppliers
explain and evaluate reducing trade credit terms offered
exp -
requires customer to pay in a shorter time frame which isn’t popular
eva -
may damage relationship with consumers
explain and evaluate extra funding
exp -
can be new way of capital raised from owner/bank loans however if cash flow is poor than loans become unlikely
eva -
outside investors can be interested but unlikely to act quickly and will want share of business