E- Break-even and cash flow forecasts

Question 1

What is Cash flow forecasting?

Answer 1

A document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months.

Question 2

Opening balance

Answer 2

amount of cash available in a business at the start of a set time period, e.g. a month.

Question 3

Closing balance

Answer 3

amount of cash available in a business at the end of a set time period, e.g. a month.

Question 4

Credit period

Answer 4

the length of time given to customers to pay for goods/services received.

Question 5

Liquidity

Answer 5

measures a firm’s ability to meet short-term cash payments.

Question 6

Insolvent

Answer 6

when a firm is unable to meet short-term cash payments

Question 7

Break-even

Answer 7

the point at which a business is not making a profit or a loss.

Question 8

Break even Formula

Answer 8

Fixed costs/contribution per unit

Question 9

Contribution

Answer 9

selling price – variable costs

Question 10

Fixed costs

Answer 10

costs which do not vary with output

Question 11

Variable costs

Answer 11

costs which vary with the level of output

Question 12

Semi-variable costs

Answer 12

part of the cost stays the same and part varies with output. E.g. telephone charge – the landline cost is fixed but the charge for calls will vary with the number of calls made.

Question 13

Total costs

Answer 13

fixed and variable costs.

Question 14

Total revenue

Answer 14

the total amount of money coming in from sales = quantity sold x selling price

Question 15

Total sales

Answer 15

the amount of sales made in a set time period, e.g. a year.

Question 16

Sales in value

Answer 16

sales expressed in monetary value = quantity sold x selling price

Question 17

Sales in volume

Answer 17

sales expressed as a quantity, e.g. tons or units

Question 18

What does a cash flow forecast predict?

Answer 18

A cash flow forecast tries to predict in advance how much cash will be received and spent.
Having a healthy cash flow is crucial to the survival of a business.

Question 19

What Are Inflows?

Answer 19

the money coming into the business from various sources

Question 20

Name The 6 Types Of Inflows Into a Business?

Answer 20

1. Loans
2. Cash Sales
3. Credit Sales
4. Capital Introduced
5. Sale Of Assets
6. Positive Interest Received On Bank Account

Question 21

What Is Capital Introduced?

Answer 21

money invested from entrepreneurs or shareholders when a business is first set up or looks to expand

Question 22

What Are Outflows or Payments?

Answer 22

Outflows or Payments is money going out of the business

Question 23

Name The 6 Types Of Outflows

Answer 23

1. Cash Purchases
2. Credit Purchases
3. Purchasing Assets
4. Bad Interest Paid To Bank for overdraft or loan
5. VAT (value added tax)
6. Rent, Wages, Rates, Utilities, Salaries, Gas, Electricity, water

Question 24

What may have happened if the cash flow closing balance is negative at the end of the working year?

Answer 24

It may have meant that more was spent on costs or it may have been due to seasonal sales so there was not as much profit

Question 25

What could happen with a business with a negative closing balance in the long run?

Answer 25

it could not pay back debts and said to be insolvent, this means that the business may have liquidity problems.

Question 26

What can a cashflow forecast help to predict?

Answer 26

it can be used to predict shortfalls in cash or when there may be too much cash or stock left over at the end of the business period.

Question 27

Name 5 Cashflow Problems?

Answer 27

seasonal sales – eg. more in summer, less in winter)

competitors taking your customers (lower sales)

minimum wage increases – raises cost of wages

cost of rent, fuel or electricity rises

paying your suppliers before customers pay you (timing issue)

Question 28

What are the 4 Solutions to Cashflow problems?

Answer 28

1. Arrange An Overdraft with the bank
2. Negotiate a longer payment term with supplier
3. Delay Capital Expenditure (spending on long term assets)
4. Leasing Equipment rather than buying the equipment straight out.

Question 29

What are the 3 benefits to cashflow forecasting?

Answer 29

1. Encourages planning and monitoring of cash inflows and outflows
2. Can show it to a bank to get a loan (part of a business plan)
3. Identifies future cash shortages (so an overdraft or loan can be requested)

Question 30

What are the 3 Disadvantages To Cashflow Forecasting?

Answer 30

Based on forecasts and may be inaccurate

Cannot plan for unexpected events such as a rise in the cost of raw materials

Sales may be lower due to tastes and fashions changing or new competitors

Question 31

What are variable costs

Answer 31

vary with the level of output, for example raw materials.

Question 32

What are Fixed Costs

Answer 32

do not vary with output, (overheads) for example rent

Question 33

Formula for Total Costs

Answer 33

Fixed Costs + Variable Costs

Question 34

What Is unit contribution?

Answer 34

Each product sold will contribute an amount to pay off fixed costs.
Once fixed costs are paid, then any further sales will contribute to profit

Question 35

What is the unit contribution formula?

Answer 35

Selling Price – variable cost per unit

Question 36

What Is margin of safety?

Answer 36

actual number of sales (or output) above the breakeven

Question 37

What is the use of breakeven planning (LEARN ALL)

Answer 37

Planning (looking ahead)
• Set budgets for the amount of sales necessary and to control costs.
• Used as part of a business plan to when the business will start to make a profit.
• Informs pricing decisions.
▸ Monitoring (ongoing)
• Monitor progress towards achieving break-even point.
• Identify changes to costs such as raw materials.
• Take corrective action if targets look unlikely to be met.
▸ Control
• Keep costs within budget.
• Motivate employees to sell or make more units.
• Manage sales accounts – control credit customers
▸ Target setting
• Set sales targets for individual employees, teams or products.
• Set expenditure budgets.
• Set profit budgets based upon sales targets and cost targets.

Question 38

Advantages and Disadvantages Of Breakeven Analysis?

Answer 38

Advantages :
Easy and quick to calculate
It can be shown to a bank to get a loan
Can set targets for sales above breakeven to earn profit
Can show the effect on breakeven if price or costs change (what if analysis)
Disadvantages:
It assumes that every product made is sold
It assumes that price and costs are unchanged for the period
It does not allow for bulk-buy discounts on supplies of raw materials or stock
It only works for one product