ch 26 cash flow forecasting

Question 1

define cash flow.

Answer 1

flow of money into and out of a business.

Question 2

define liquid.

Answer 2

asset that is easily changed into cash.

Question 3

define overheads.

Answer 3

money spent regularly on rent, insurance, electricity and other things that are needed to keep a business operating.

Question 4

define insolvent.

Answer 4

inability to meet debts.

Question 5

define cash flow forecast.

Answer 5

prediction of all expected receipts and expenses of a business over a future time period, which shows the expected cash balance at the end of each month.

Question 6

what are the importance of cash in a business?

Answer 6

• to pay suppliers, overheads and employees
  -> failure to pay suppliers on time may mean that they will refuse to trade in the future
  -> if a business cannot pay its employees, they will walk out
• to prevent business failure
  -> insolvency -> business closes down
  -> unless a business can raise cash immediately to pay the most pressing debts, the business will collapse

Question 7

how can a business have better control over its cash flow?

Answer 7

• keeping up to date records of financial transactions
• always plan ahead by producing accurate cash flow forecasts
• operates an efficient credit control system, which prevents slow or late payment

Question 7

how can a business have better control over its cash flow?

Answer 7

• keeping up to date records of financial transactions
• always plan ahead by producing accurate cash flow forecasts
• operates an efficient credit control system, which prevents slow or late payment

Question 8

what are the differences between cash and profit?

Answer 8

• some goods are sold on credit. so at the end of the period, some customers will still owe money. therefore, profit is greater than cash.
• sometimes owner might put more cash into the business which will increase the cash balance of the business. it will have no effect on the profit made.
• purchasing fix assets will reduce the cash balance, but have no effect on the profit the company makes.
• the amount of cash at the end of the period will be different from profit because at the beginning of the year the cash balance is unlikely to be zero.

Question 9

define cash inflow.

Answer 9

flow of money into a business.

Question 10

give examples of cash inflow in a business.

Answer 10

sales revenue, loans, fresh capital from the owners, sale of assets.

Question 11

define cash outflow.

Answer 11

flow of money out of a business.

Question 12

give examples of cash outflow in a business.

Answer 12

wages, raw materials, machinery, rent, tax.

Question 13

what is net cash flow?

Answer 13

the difference between cash inflows and cash outflows.

Question 14

a business will hope that for most of the time the net cash flow is ____.

Answer 14

positive

Question 15

what do businesses do when net cashflow is negative?

Answer 15

the business will have to borrow money.

Question 16

define drawings.

Answer 16

money taken out of the business by the owner for personal use.

Question 17

define closing cash balance.

Answer 17

the amount of cash that the business expects to have at the end of each month (takes into account the cash inflows and cash outflow)

Question 18

why are cash flow forecasts important?

Answer 18

• identifying cash shortages -> know when to borrow cash
• supporting applications for funding -> help to show the future outlook of the business
• help when planning the business -> helps to clarify aims and improve performance
• monitoring cash flow -> find our where problems occur, investigate the reasons why the figures were difference