Ch 23 - Cash flow

Question 1

what is cash flow?

Answer 1

actual money coming in and going out (cash inflows and cash outflows) of a business in a certain period of time

Question 2

what are cash inflows? used for?

Answer 2

actual money (not credit) received by business over a period of time
–> its used to keep business running (like buying raw materials)

Question 3

examples of cash inflows? [6]

Answer 3

-donations
-sale of assets
-sales
-loans
-payment of debtors
-investors

Question 4

what is cash outflow?

Answer 4

actual, physical money that is paid out by a business over a period of time

Question 5

examples of cash outflows? [7]

Answer 5

-purchasing goods / materials
-paying salaries
-fixed costs (rent)
-variable costs (fuel, food)
-purchasing non current assets
-repaying loans
-paying creditors

Question 6

cash flow cycle?

Answer 6

buying raw materials –> finished products –> sell products –> cash received –> cash needed to pay for –> buying raw materials –> …

Question 7

what happens when there is quicker cash flow? slower cash flow cycle?

Answer 7

money earned quicker

working capital increases

Question 8

what is insolvent?

Answer 8

business having no money

Question 9

what is opening cash / opening balance?

Answer 9

money at the beginning of the month

Question 10

closing cash formula?

Answer 10

net cash flow + opening cash

Question 11

net cash flow formula?

Answer 11

total cash inflow - total cash outflow

Question 12

what to do if there’s a negative closing cash?

Answer 12

business can’t operate so:
-cash inflow needs to increased
-cash outflow needs to be reduced
-take short term bank loan / bank overdraft

Question 13

how to increase sales?

Answer 13

-increase marketing

Question 14

3 uses of cash flow forecasts?

Answer 14

-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

Question 15

what can you do with extra cash?

Answer 15

-invest
-grow / develop business
-buy technology
-grow branches
-put in bank
-buy property

Question 16

4 ways to solve cash flow problem?

Answer 16

-bank loan
-delayed payment to suppliers
-ask customer to pay quick
-delayed purchase of equipment

Question 17

advantages of: [2]
-bank loan
-ask customer to pay quick

Answer 17

-get money
-solve problem

Question 18

advantages of: [2]
-delayed purchase of equipment
-delaying payment to suppliers

Answer 18

-cash outflow decreases
-problem solved

Question 19

disadvantages of bank loans? [2]

Answer 19

-need to return money with interest
-outflow

Question 20

disadvantages of delaying payment to suppliers? [4]

Answer 20

-can sue
-no discounts
-supplier is not happy
-pay more next month (outflow)

Question 21

disadvantages of asking customers to pay quick [1]

Answer 21

lose customers to competitors

Question 22

disadvantages of delayed purchase of equipment [3]

Answer 22

-no equipment
-less goods produced
-function of business is pampered

Question 23

2 ways to solve cash flow problem long term? advantage? disadvantage?

Answer 23

-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

Question 24

what is working capital?

Answer 24

continuous / re-occuring capital available to a business for short term / day to day basis expenses

Question 25

formula for working capital?

Answer 25

current assets - current liabilities

Question 26

what does working capital determine?

Answer 26

overall success of a business
–> shows efficiency and financial strength of a business

Question 27

what are cash sales?

Answer 27

immediate money

Question 28

what are credit sales?

Answer 28

buy now, pay later

Question 29

who are debtors?

Answer 29

those who buy on credit and need to return money to you

Question 30

what are account receivables?

Answer 30

money needed to receive from credit sales

Question 31

who are creditors?

Answer 31

those who you need to give money back to

Question 32

what are account payables?

Answer 32

money needed to pay to creditors

Question 33

what happens if cash runs out? [3]

Answer 33

-can’t pay employees
-can’t produce goods
-business forced in ti liquidation (settling up until all debts are paid)

Question 34

different forms of working capital [3]

Answer 34

-inventory stores
-cash
–> pay day to day costs and inventories
-higher sales should have additional credit facilities