chapter 23 - cash flow forecasting & working capital

Question 1

definition of:

cash flow

Answer 1

cash inflows and cash outflows over a period of time

Question 2

definition of:

cash inflow

Answer 2

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

Question 3

definition of:

cash outflows

Answer 3

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

Question 4

definition of:

cash flow cycle

Answer 4

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

Question 5

definition of:

cash flow forecast

Answer 5

estimate of future cash inflows and cash outflows of a business, usually on a month by month basis. It shows the expected cash balance at the end of each month

Question 6

why is cash important for business

Answer 6

it’s a liquid asset (immediately available for spending on goods and services)

Question 7

examples of cash inflow

Answer 7

• sales of products
• payment by debtors
• sales of assets
• borrowing money from external sources
• investors

Question 8

examples of cash outflow

Answer 8

• purchase of materials
• wages
• paying creditors
• purchasing fixed assets
• repaying loans

Question 9

what is net cash flow

Answer 9

cash inflow-cash outflow

Question 10

explain the cash flow cycle

Answer 10

1. cash needed to pay for materials and wages
2. produce goods
3. sell goods
4. receive cash payment from sales of goods

*the longer the time it takes to complete these stages, the greater will be the firm’s need for working capital and cash

Question 11

what does the cash flow forecast show?

Answer 11

• how much cash is available for paying bills, repaying loan and buying nca
• how much cash the bank might need to lend the business in order to avoid insolvency
• whether the business is holding too much cash which could be put to a more profitable use

Question 12

purpose of cash flow forecast

Answer 12

• start up a business
• manage existing business
• keep bank manager informed (see how big a loan is needed)
• manage cash flow (pay off loans/ use capital wisely)

Question 13

if there’s a negative closing balance, what to do?

Answer 13

• opt for cheaper materials
• lower wages
• cut down expenses
• sell unwanted assets

Question 14

definition of:

working capital

Answer 14

difference between resources in cash or readily convertible into cash and short term debts of business

Question 15

how to overcome cash flows problem?

Answer 15

• delay payment to suppliers
• ask debtors to pay quickly
• cancel purchases of capital equipment
• attract new investors
• increase bank loans
• develop new products to attract more customers