E.1 Cash Flows

Question 1

What is the equation for net cash flow?

Answer 1

Total inflows - total outflows

Question 2

Give three advantages of cash flow forecasting

Answer 2

1. Planning for the future
2. Can make better decisions for unforeseen problems
3. Identify times extra financial support is needed
4. Can see where the largest sums of money are being spent, assess if this can be reduced
5. People who want to invest in a business will want to see it
6. Performance monitoring
7. Shows when money should be coming in so reminds you to chase payments

Question 3

Give three disadvantages of cash flow forecasting

Answer 3

1. Rent may increase unexpectedly and this is out of your control so isn’t planned for
2. Inflows and outflows predictions may be inaccurate
3. It is a prediction

Question 4

What is a cash flow forecast?

Answer 4

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

Question 5

What order is the structure of a basic cash flow forecast?

Answer 5

1. Inflows
2. Total inflows
3. Outflows
4. Total outflows
5. Net cash flow
6. Opening balance
7. Closing balance

Question 6

What are inflows?

Answer 6

Movements of cash into a business. Cash flows into the bank account when customers pay for their sales, when a loan is received from the bank, interest is received or when assets are sold.

Question 7

What are total inflows?

Answer 7

All of the inflows of the business added together.

Question 8

What are outflows?

Answer 8

Movements of cash out of the business. Cash flows out of the bank account when suppliers are paid, employee wages and salaries are paid, interest is paid to the bank and so on.

Question 9

What are total outflows?

Answer 9

All of the outflows of the business added together.

Question 10

What is net cash flow?

Answer 10

The difference between cash inflows and cash outflows.

Question 11

What’s the equation for net cash flow?

Answer 11

Net cash flow = total inflows – total outflows

Question 12

What is the opening balance?

Answer 12

The balance in the bank at the start of a period. The opening balance in any one month should equal the closing balance at the end of the previous month.

Question 13

What is the closing balance?

Answer 13

The amount in the bank at the end of the month. The closing balance at the end of the previous month becomes the opening balance for the next month.

Question 14

What is the equation for the closing balance?

Answer 14

Closing balance = opening balance + net cash flow