Ch 23 - Cash flow Flashcards
what is cash flow?
actual money coming in and going out (cash inflows and cash outflows) of a business in a certain period of time
what are cash inflows? used for?
actual money (not credit) received by business over a period of time
–> its used to keep business running (like buying raw materials)
examples of cash inflows? [6]
-donations
-sale of assets
-sales
-loans
-payment of debtors
-investors
what is cash outflow?
actual, physical money that is paid out by a business over a period of time
examples of cash outflows? [7]
-purchasing goods / materials
-paying salaries
-fixed costs (rent)
-variable costs (fuel, food)
-purchasing non current assets
-repaying loans
-paying creditors
cash flow cycle?
buying raw materials –> finished products –> sell products –> cash received –> cash needed to pay for –> buying raw materials –> …
what happens when there is quicker cash flow? slower cash flow cycle?
money earned quicker
working capital increases
what is insolvent?
business having no money
what is opening cash / opening balance?
money at the beginning of the month
closing cash formula?
net cash flow + opening cash
net cash flow formula?
total cash inflow - total cash outflow
what to do if there’s a negative closing cash?
business can’t operate so:
-cash inflow needs to increased
-cash outflow needs to be reduced
-take short term bank loan / bank overdraft
how to increase sales?
-increase marketing
3 uses of cash flow forecasts?
-planning
–> predictions
–> can manage / plan ways to cut expenses (decrease outflow) and increase inflow
-managing cash flow
–> short of cash? extra cash?
-starting up business
–> need to know how much money is needed
-running business
–> borrowing money should be done in advance
-keep bank manager informed
–> so that they can provide loans and business can get a bank loan
–> banks need to see if business can repay loans so banks will ask for the forecast
what can you do with extra cash?
-invest
-grow / develop business
-buy technology
-grow branches
-put in bank
-buy property
4 ways to solve cash flow problem?
-bank loan
-delayed payment to suppliers
-ask customer to pay quick
-delayed purchase of equipment
advantages of: [2]
-bank loan
-ask customer to pay quick
-get money
-solve problem
advantages of: [2]
-delayed purchase of equipment
-delaying payment to suppliers
-cash outflow decreases
-problem solved
disadvantages of bank loans? [2]
-need to return money with interest
-outflow
disadvantages of delaying payment to suppliers? [4]
-can sue
-no discounts
-supplier is not happy
-pay more next month (outflow)
disadvantages of asking customers to pay quick [1]
lose customers to competitors
disadvantages of delayed purchase of equipment [3]
-no equipment
-less goods produced
-function of business is pampered
2 ways to solve cash flow problem long term? advantage? disadvantage?
-get shares / partners
-cut costs and increase efficiency
-develop new products
-increase capital
adv: saving business
dis: losing control, product quality decreases due to the complaints of workers, need cash for development and takes long time
what is working capital?
continuous / re-occuring capital available to a business for short term / day to day basis expenses
formula for working capital?
current assets - current liabilities
what does working capital determine?
overall success of a business
–> shows efficiency and financial strength of a business
what are cash sales?
immediate money
what are credit sales?
buy now, pay later
who are debtors?
those who buy on credit and need to return money to you
what are account receivables?
money needed to receive from credit sales
who are creditors?
those who you need to give money back to
what are account payables?
money needed to pay to creditors
what happens if cash runs out? [3]
-can’t pay employees
-can’t produce goods
-business forced in ti liquidation (settling up until all debts are paid)
different forms of working capital [3]
-inventory stores
-cash
–> pay day to day costs and inventories
-higher sales should have additional credit facilities
