Chapter 30: Forecasting And Managing Cash Flows

Question 1

Define cash flow

Answer 1

Cash flow: the sum of cash payments to a business (inflows) less the sum of cash payments (outflows).

Question 2

Define liquidation

Answer 2

Liquidation: when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.

Question 3

Define insolvent

Answer 3

Insolvent: when a business cannot meet its short-term debts.

Question 4

Define cash inflows

Answer 4

Cash in flows: payments in cash received by a business, such as those from customers (trade receivables) or from the bank, e.g. receiving a loan.

Question 5

Define cash outflow

Answer 5

Cash out flows: payments in cash made by a business, such as those to suppliers and workers.

Question 6

Define cash flow forecast

Answer 6

Cash-flow forecast: estimate of a firm’s future cash inflows and outflows.

Question 7

Define net monthly cash flow

Answer 7

Net monthly cash flow: estimated difference between monthly cash inflows and cash outflows.

Question 8

Define opening cash balance

Answer 8

Opening cash balance: cash held by the business at the start of the month.

Question 9

Define closing cash balance

Answer 9

Closing cash balance: cash held at the end of the month becomes next month’s opening balance.

Question 10

Define overtrading

Answer 10

Overtrading: expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops.

Question 11

Define credit control

Answer 11

Credit control: monitoring of debts to ensure that credit periods are not exceeded.

Question 12

Define bad credit

Answer 12

Bad debt: unpaid customers’ bills that are now very unlikely to ever be paid.

Question 13

Define creditors

Answer 13

Creditors: suppliers who have agreed to supply products on credit and who have not yet been paid.