Chpt.22 Cash flow forecasting and working capital

Question 1

Define ‘Cash flow’ [1]

Answer 1

1. term referring to the cash inflows and outflows of a business

Question 2

describe ‘cash inflows’ [1]

Answer 2

1.The sums of moneys received by a business during a period of time.

Question 3

why is cash important to a business? [2]

Answer 3

1.A business needs to have an adequate amount of cash to be able to pay for all it’s short-term payments
2.If a business doesn’t have any cash to pay its workers, suppliers, landlord and government, the business will go into LIQUIDATION

Question 4

what counts as cash inflows: [6]

Answer 4

1. Sales revenue
2. payment from debtors
3. loans/grants
4. money from selling business assets
5. dividend
6. share sales

Question 5

describe ‘cash outflows’ [1]

Answer 5

1.sums of money paid out by the business over a period of time

Question 6

what counts as cash outflow? [5]

Answer 6

1. purchasing goods and materials for cash
2. utilities bills, taxes, wages
3. purchasing fixed assets
4. repaying loans
5. paying creditors of the business

Question 7

what is the cash flow cycle? [5]

Answer 7

1.Cash needed to pay for
2. raw materials, wages, rent, other bills
3. goods/services produced
4. goods/services sold
5. cash received for goods/services sold

Question 8

how is Cash flow different from profit? [2]

Answer 8

1.Profit is surplus amount after totals costs have been deducted from sales.

2.Cash flow; only elements paid by cash are considered

Question 9

What is a cash flow forecast for? [1]

Answer 9

1. to make an estimate of future cash flows of a business - shows expected cash balance

Question 10

the opening cash/bank balance is… [1]

Answer 10

1. the amount of cash held by the business at the start of the month

Question 11

formula for Net Cash Flow [2]

Answer 11

Net cash flow = total cash inflow - total cash outflow

Question 12

how do you find the closing cash/bank balance? [2]

Answer 12

closing cash/bank balance = Net cash flow + opening cash balance

Question 13

What are the uses of cash flow forecast? [3]

Answer 13

1. Setting up a business - manager needs to know the amount of cash needed to set up the business
2. a cash flow statement is required by the bank managers when a business applies for a loan. - The bank needs to know how much to lend, and when it can be repaid
3. managing cash flow - if cash flow is (negative), business needs to plan ahead to avoid

Question 14

How can cash flow problems be overcome? (short-run) [4]

Answer 14

1. increase bank loans: inject more money into the business, but will need to pay regular interest payments
2. delay payments to suppliers: will help in the short-run. however, suppliers could refuse.
3. ask debtors to pay more quickly: will increase in the short-run. However customers may move to other businesses which offer more time to pay
4. delay or cancel purchases of capital equipment: will greatly reduce cash outflow in short-run. However, efficiency will go down.

Question 15

how can cash flow problems be overcame in the long-run? [3]

Answer 15

1. attract more investors into the business: sell more shares. However, will lose control over business
2. increase efficiency: will cut costs
3. develop more products: increase inflow

Question 16

what is the Working Capital? [1]

Answer 16

Working capital is all of the liquid assets of a business

Question 17

how to improve working capitals? [1-4/2-3]

Answer 17

1. increase current assets
   - improve cash flow
   - cut cost/case outflow
   - dispose assets
   - tighten credit control
2. reduce current liabilities
   - pay off short-term debts
   - refinance short-term debts
   - reduce purchase of goods on credit

Question 18

what are possible cash flow problems? [5]

Answer 18

1. excess inventory
2. expansion too quickly
3. purchasing too much non-current assets
4. too much loan debt/poor credit control
5. inflation