Cashflow / Working capital

Question 1

What is cash flow forecasts ?

Answer 1

An estimate of inflows and outflows in a business - showing cash coming in and out

Question 2

What are the reasons for cashflow forecast ?

Answer 2

Valuable planning procedure

Managers uses it to monitor teams

CFF looked at by shareholders / stakeholders

Seen by suppliers / banks to make payments

Question 3

What are some limitations of cashflow forecast ?

Answer 3

Doesn’t consider changes in interest rates , inflation , tech advances and competitor behaviour

Forecasts are just a prediction

Other world events not considered ( war )

Question 4

What is the impact of cashflow forecasts and statements on a business ?

Answer 4

Measures performance
Management can monitor by comparing with statement
Managers can correct imperfections
Potential lenders can see forecasts to repay any loans

Question 5

What are the causes of cashflow problems ?

Answer 5

Level of sales ( fall of sales )
Legislation and the business environment
Late repayment from debtors
Creditors paid too quickly
Overtrading / increased productivity puts strain on cashflow

Question 6

What does a low liquidity ratio show a business ?

Answer 6

They cannot meet creditor requests / may need to borrow to cover this

Question 7

What does a high liquidity ratio show a business ?

Answer 7

Too much cash - wasted chance to buy more stock - if not put to good use then there is a waste of returns ( interest lost from not being in a bank / dividends lost from not investing )

Question 8

How does a business improve their cashflow ?

Answer 8

Increase sales / reduce prices or advertise better
Factoring assets or selling off old assets
Lease machinery instead of buying out right
Outsource to cut operating costs
Change creditor / debtor days