cash flow forecasting and working capital

Question 1

Why is cash important?

Answer 1

If a firm doesn’t have any cash to pay its workers, suppliers, landlord and government, the business could go into liquidation.

liquidation– selling everything it owns to pay its debts.

Question 2

define Cash Flow

Answer 2

the cash inflows and outflows over a period of time

Question 3

define Cash inflows

Answer 3

are the sums of money received by the business over a period of time

Question 4

how cash inflows into a busimess? (5)

Answer 4

• sales revenue from sale of products
• payment from debtors– debtors are customers who have already purchased goods from the business but didn’t pay for them at that time
• money borrowed from external sources, like loans
• the money from the sale of business assets
• investors putting more money into the business

Question 5

how cash outflow out a busimess? (5)

Answer 5

• purchasing goods and materials for cash
• paying wages, salaries and other expenses in cash
• purchasing fixed assets
• repaying loans
• by paying creditors of the business- creditors are suppliers who supplied items to the business but were not paid at the time of supply.

Question 6

define Cash outflows

Answer 6

are the sums of money paid out by the business over a period of time

Question 7

difference between profit and
cash

Answer 7

• Profit is the surplus amount after total costs have been deducted from sales.
• Profit is a source of finance.
• Profit is a measure of success and is a reward for risk-taking
• cash flow, only those elements paid by cash are considered and is necessary to help avoid cash flow problems

Question 8

define
a Cash Flow Forecasts

Answer 8

an estimate of future cash inflows and outflows of a business, usually on a month-by-month basis.

Question 9

how can cash flow forecasts help the managers see? (4)

Answer 9

• how much cash is available for paying bills, purchasing fixed assets or repaying loans
• how much cash the bank will need to lend to the business to avoid insolvency (running out of liquid cash)
• whether the business has too much cash that can be put to a profitable use in the business

Question 10

uses of Cash Flow Forecasts (4)

Answer 10

1. starting up a bst - manager needs to know how much cash is required to set up the business. The cash flow forecast helps calculate the cash outflows
2. running an existing bst
3. required by bank managers when the business applies for a loan - he bank manager will need to know how much to lend to the business for its operations, when the loan is needed, for how long it is needed and when it can be repaid.
4. managing casl flow - negative cash flow then the business will need to plan ahead and apply for an overdraft.
   If there is too much cash, the business may decide to repay loans or pay off creditors/suppliers.

Question 11

define opening cash/bank balance

Answer 11

is the amount of cash held by the business at the start of the month

Question 12

Net Cash Flow formula

Answer 12

Net Cash Flow = Total Cash Inflow – Total Cash Outflow

Question 13

define closing cash/bank balance

Answer 13

the amount of cash held by the business at the end of the month

Question 14

How can cash flow problems be overcome in the short-trem ? (4)

Answer 14

1. Increase bank loans
2. Delay payment to suppliers
3. Ask debtors to pay more quickly
4. delay or cancer purchases pf capital equipment

Question 15

How can cash flow problems be overcome in the long-trem ? (3)

Answer 15

• attract more investors
• cut costs by increasing efficiency
• develop more products to attract customers and increase inflows

Question 16

define Working Capital

Answer 16

the capital avaible to a BST in the short term to pay day to day expenses.

Working capital is all of the liquid assets of the business

Question 17

Working Capital formula

Answer 17

Working Capital = current assets - current liabilities

Question 17

Working capital can be held in the form of (3)

Answer 17

• cash needed to pay day to day expenses
• cash due from debtors – debtors/credit customers can be asked to quickly pay off what they owe to the business in order for the business to raise cash
• cash in the form of inventory - nventory of finished goods can be quickly sold off to build cash inflows.

Question 18

define profit

Answer 18

the surplus after total costs have been subtracted for revenue.

Question 19

define cash flow cycle

Answer 19

showes the stages between paying out cash for labour, materials, and so on, and receiving cash from the sales.