Chapter 30: Forecasting and managing cash flows

Question 1

Cash flow

Answer 1

cash payments in - cash payments out

Question 2

Insolvent

Answer 2

When a business cannot meet its short-term debts

Question 3

Cash flow forecasts

Answer 3

Estimate of future cash inflows and outflows

Question 4

Why is a cash flow forecast important to new businesses?

Answer 4

New business start-ups are often given short credit periods
Banks need to see the forecast to make finance available
Accurate planning is significant because of tight finance

Question 5

Cash inflow

Answer 5

Cash payments into a business

Question 6

Cash outflow

Answer 6

Cash payments out of a business

Question 7

Structure of cash flow forecasts

Answer 7

Cash inflows
Cash outflows
Net cash flow
Opening and closing balance

Question 8

Net cash flow

Answer 8

Estimated difference between cash inflows and cash outflows for the time period

Question 9

Opening cash balance

Answer 9

Cash held by the business at the start of the month

Question 10

Closing cash balance

Answer 10

Cash held by the business at the end of the month, which becomes the opening balance of the next month

Question 11

Benefits of cash flow forecasting

Answer 11

1. They show negative closing balances, allow planning for finance
2. Indicate times of excessive negative cash flow, allowing for planning for cash flow improvements
3. Essential to all business plans, allows access to loans

Question 12

Limitations of cash flow forecasting

Answer 12

Mistakes can be made in preparing revenue and cost forecasts
Unexpected costs can lead to major inaccuracies
Incorrect assumptions can be made in sales estimations

Question 13

Causes of cash flow problems

Answer 13

Lack of planning
Poor credit control
Too much credit period offered
Expanding too rapidly
Unexpected events

Question 14

Credit control

Answer 14

Monitoring debts to ensure that credit periods are not exceeded

Question 15

Bad debt

Answer 15

Unpaid customers’ bills that are now very unlikely to be paid

Question 16

Overtrading

Answer 16

Expanding a business rapidly without obtaining all of the necessary finance, resulting in a cash flow shortage

Question 17

Methods of improving cash flow

Answer 17

Overdraft
Short-term loan
Sale of assets
Sale and leaseback
Manage trade receivables
Delay capital expenditure
Leasing, not buying
Cut overhead costs such as promotion
Manage trade payables

Question 18

Possible drawbacks of overdrafts

Answer 18

High interest rates
Overdrafts can be withdrawn

Question 19

Possible drawbacks of short-term loans

Answer 19

Interest has to be paid
The loan must be repaid by the due date

Question 20

Possible drawbacks of the sale of assets

Answer 20

Quick selling can result in low prices
Assets might be needed later date for expansion
Assets could have been used as collateral for a future loan

Question 21

Possible drawbacks of sale and leaseback

Answer 21

Leasing costs add annual overhead costs
Loss of potential profit if assets rise in price
Assets could have been used as collateral for a future loan

Question 22

Possible drawbacks of delaying capital expenditure

Answer 22

Efficiency may reduce if inefficient equipment is not replaced
Expansion becomes very difficult

Question 23

Possible drawbacks of leasing

Answer 23

The business does not own the asset
Leasing charges add to annual overheads plus interests