Cash Flow & Profit and Loss Accounts Flashcards
What is cash flow?
Amount of money flowing in and out of the business
Cash flow forecast?
A prediction of movement of money into and out of the business over a period of time (including revenue, expenses and balances)
Net Cash Flow =
revenue - expenses
How can cash flow be controlled?
- Planning ahead
- Control over credit system
- Recording transactions
Closing balance =
opening balance +/- net cash flow
- if net cash flow is negative
+ if net cash flow is positive
Problems with cash flow forecast
- Further in future projection is made more inaccurate data is
- Subject to change as environment is dynamic:
- Low sales may occur due to competition, increased tax
- Internal factors such as impulse buying, debt, no budget
- Rising costs due to inflation, labour and raw materials.
Usefulness of forecast
- Identifies timings of shortages and surpluses to plan ahead.
-Supports attempt to raise finance e.g investors, loans. - Assists in determining liability of new business venture.
How can cash flow be improved?
- Increase revenue: higher selling prices, promotion, destocking
- Reduce costs: advertising, raw material, use of outside contractors.
- Debt factoring, sale of assets, chasing up debtors.
- Delay payments to suppliers
Benefits of cash flow forecast
- Allows businesses to see financial performance
- Identify times funding is needed e.g deficits.
- Potential periods of surpluses to plan spending.
-Helps to secure financial investment and in business plans
Drawbacks of cash flow forecast?
- Usefulness is influenced by external factors outside the businesses control
- Takes up valuable management time
-New businesses have little data to create a forecast.
cost of sales =
opening stock + purchases - closing stock
gross profit =
revenue - cost of sales
net profit =
gross profit - expenses
retained profit =
net profit - tax + dividends
gross profit margin =
gross profit / sales x 100
