Chapter 23 - Cash Flow Forecasting And Working Capital

Question 1

Cash flow

Answer 1

Cash inflows and outflows over a period of time

Question 2

Problems a business faces if it lacks cash (3)

Answer 2

Unable to pay worker, suppliers, landlord, government
Production of goods and services will stop
Business may be forced into liquidation-selling everything it owns to pay its debts

Question 3

Cash inflows

Answer 3

Sums of money received by a business during a period of time

Question 4

Cash outflows

Answer 4

Sums of money paid out by a business during a period of time

Question 5

How can cash flow into a business (5)

Answer 5

Sale of products for cash
Payments made by debtors
Borrowing money from an external source
Sale of business assets
Investors

Question 6

How can cash flow out of a business (5)

Answer 6

Purchasing goods/materials for cash
Paying wages, salaries and other expenses in cash
Purchasing non-current assets
Repaying debts
Paying creditors of the business

Question 7

Cash flow cycle

Answer 7

Shows the stages between paying out cash for labour, materials and so on and receiving cash from the sale of goods.

Question 8

What the cash-flow diagram shows (5)

Answer 8

Cash needed to pay for
Wages, materials etc.
Goods produced
Goods sold
Cash payments received for goods sold

Question 9

Name for when a profitable business runs out of cash and reasons (3)

Answer 9

Insolvency
-allowing customers too long a credit period
-purchasing too many fixed assets at once
Expanding too quickly and keeping a high inventory level (overtrading)

Question 10

Cash flow forecast

Answer 10

Estimate of future cash inflows and outflows of a business, usually on a month-by-month basis. Shows the expected cash balance at the end of each month

Question 11

What a cash-flow forecast tells a manager (3)

Answer 11

Amount of available cash
How much the bank needs to lend for the business to avoid insolvency
Whether the business is holding cash which could be put to more profitable use

Question 12

Use of cash flow forecasts (4)

Answer 12

Starting up a business
Running an existing business
Keeping the bank manager informed
Managing cash-flow

Question 13

Net cash flow

Answer 13

Difference, each month, between inflows and outflows

Question 14

Closing cash (bank) balance

Answer 14

Amount of cash held by the business at the end of each month that becomes the next month’s opening cash balance

Question 15

Opening cash (bank) balance

Answer 15

Amount of cash held by the business at the start of the month

Question 16

Use of cash-flow forecast when starting up a business

Answer 16

Helps owners see how much cash will be needed in the first few months of operation and avoid business failure in the first few crucial months

Question 17

Use of a cash flow forecast to keep the bank manager informed

Answer 17

Bank manager needs to see how big of a loan/overdraft is needed, when it is needed, and when it will be repaid before loaning anything

Question 18

Use of cash-flow forecast when managing an existing business

Answer 18

Allows borrowing of money to be planned out in advance to take advantage of lower interest rates

Question 19

How to actively manage the cash flow of a business examples (2)

Answer 19

Pay off loans to reduce interest charges
Pay creditors quickly to take advantage of possible discounts

Question 20

Methods of overcoming short-term cash flow problems (4)

Answer 20

Increasing bank loans - increase inflows short term
Delaying payments to suppliers - decrease outflows short term
Asking debtors to pay more quickly/insisting cash sales - increase inflows short term
Delay/cancel purchases of equipment - decrease outflows

Question 21

How businesses deal with long term cash flow difficulties (3)

Answer 21

Attracting new investors
Cutting costs and increasing efficiency
Develop new products to attract new customers

Question 22

Increasing bank loans to overcome cash flow problems limitations (2)

Answer 22

Interest must be payed which reduces profits
Loans have to be repaid eventually (cash outflow)

Question 23

Delaying payments to suppliers to overcome cash flow problems limitations (2)

Answer 23

Suppliers could refuse to supply
Suppliers could offer lower discounts for late payments

Question 24

Insisting on cash only sales as a method of overcoming cash flow problems limitation (1)

Answer 24

Customers may go to another business that still offers credit

Question 25

Delaying/canceling the purchases of capital equipment as a method Mof overcoming cash flow problems limitations (1)

Answer 25

Long term efficiency of the business could decrease without up-to-date equipment

Question 26

Working capital

Answer 26

Capital available to the business in short-term to pay for day-to-day expenses

Question 27

How working capital is held (3)

Answer 27

Cash
Value of a firms debtors
Value of inventories