Chapter 23 Flashcards
What is profit?
Surplus that is remaining after the total costs are deducted from revenue
What is insolvency?
When a business runs out of cash
How can a profitable business face insolvency?
- having along window period for customers to pay back the business (a long credit period)
- buying the many fixed assets at once
- high inventory levels
- expanding toe quickly
Cash flow forecast?
Estimates the cash inflows and outflows of a business on a month by month basis.
This also shows the expected cash balance at the end each of month
What can the cash how forecast tell the manager?
How much cash is needed for the businesses-cash inflows and outflows.
Inflows- how much cash a business may need for bank loans to prevent insolvency
Outflows- wasteful inventory that can be sold (whether the business is holding too much cash), how much money is needed for buying fixed and current assets like wages, dividends.
Why is cashflow forecast useful?
Starting up a business: often new managers don’t realize new expensive it is to start up a business. Factors of production need to be bought to sell goods, 95 well as promotion.
Running an existing business calculating in advance how much money is needed for a lean (low interest rates), and to produce goods
Keeping bank manger informed: this helps a business get a loan and can tell the manager whether the business is viable for one and how long they can pay it back
What is net cash flow?
The difference between the cash inflows and outflows of a business per month.
What is closing cash balance and opening cash balance:
Closing cash balance is the amount of cash held by the business at the end of each month which turns into the opening cash balance for the beginning of a new month.
What are the short term methods for overcoming cash flow problems?
- Increasing bank loans (cash inflows)
- delaying payments to suppliers (cash outflows)
- asking debtors for faster payments (cash inflows)
- delay or cancel capital machinery orders (cash outflows)
Limitations of increasing bank loans?
Bank loans will need to be paid later on with added interest, increasing cash outflows in the lengterm. Security or collateral is required too, which holds the business accountable.
Limitations of delaying payments to suppliers?
They may reduce the discounts on raw material for late payments, less material coming into the business for production leading to less sales, and they may cancel orders
Limitations of asking debtors to pay quicker?
Customers may Ge to competing businesses who may still offer more time to pay.
Limitations of delaying capital machinery orders?
Longterm efficiency of business may decrease due to outdated equipment.
How can cash flow problems be overcome in the length?
- Issuing of shares (loss of control in company)
- reducing costs (product quality may be affected)
- developing new products (can take time and business costs)
