Cash Flow Forecasting Flashcards

1
Q

what is cash flow?

A

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

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2
Q

what are the 5 key terms related to a cash flow forecast and give their definitions?

A

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

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3
Q

what are three factors that can cause poor cash flow and expand on each one?

A

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

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4
Q

define cash deficit

A

occurs when the closing balance is negative meaning a business doesn’t have sufficient cash to meet its payments

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5
Q

define cash surplus

A

occurs when the closing balance is positive meaning business has more cash than they need to cover their payments

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6
Q

what are 9 methods to improve cash flow?

A

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

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7
Q

explain and evaluate arranging a bank overdraft

A

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

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8
Q

explain and evaluate increase selling price of products

A

exp -
business generate more cash from each sale

eva -
businesses in competitive markets may not able to or else consumers will switch competitors

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9
Q

explain and evaluate spread payments equally over a year

A

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

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10
Q

explain and evaluate delaying purchases of expensive capital punishment

A

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

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11
Q

explain and evaluate reduce fixed costs

A

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

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12
Q

explain and evaluate buying cheaper raw materials

A

exp -
can save business money in short term however depends of quality remains the same

eva -
can damage reputation

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13
Q

explain and evaluate paying suppliers on trade credit

A

exp -
delay payment by purchasing supplies and materials on credit by a month or more

eva -
can damage relationship with suppliers

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14
Q

explain and evaluate reducing trade credit terms offered

A

exp -
requires customer to pay in a shorter time frame which isn’t popular

eva -
may damage relationship with consumers

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15
Q

explain and evaluate extra funding

A

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

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16
Q

give 4 benefits of using a cash flow forecast

A

accurate cash flow forecast allows businesses to get clear idea of how it’s performing and how it will perform in the future even though it doesn’t provide accurate statement of profitability

allows managers to specify times when businesses need extra funding eg when cash outflow exceeds inflow

inconsistencies in future performance can be identified and solved

when predicted a large positive cash flow, businesses can plan ahead on how to use this money - investing/paying off debts

17
Q

give 4 limitations of cash flow forecasts

A

takes management time which can be productively used to complete other tasks

need to be accurate to have value - may be difficult if businesses have no/little trading history

longer the timescale, the less accurate

need to be monitored to have ongoing usefulness

18
Q

evaluate the impact of cash flow forecasts on shareholders/investors

A

effective cash flow management is important for business to stay in business
poor management can lead to businesses failing

19
Q

evaluate the impact of cash flow forecasts on employees

A

should reduce the likelihood of businesses not having enough cash to pay employees

20
Q

evaluate the impact of cash flow forecasts on the bank

A

should help business manage finance effectively so the bank should be paid back on time

business may apply for an overdraft so the bank has an opportunity to profit

21
Q

evaluate the impact of cash flow forecasts on suppliers

A

should enable businesses to pay suppliers on time to avoid conflict/fines

business may ask for extended trade credit terms to ease cash flow problems