Finance Flashcards
What is a cash flow forecast?
A cash flow forecast is used to predict how much money a business will have in the future. It is an example of planning
What does opening cash mean?
Opening cash is how much money the business plans on having in cash at the beginning of its cash flow forecast period
It is the closing cash from the previous month
What does net cash mean?
Net cash is calculated by taking total payments from total receipts, showing whether the business plan to be up or down for cash that month
What does closing cash mean?
Closing cash is how much the business plans to have at the end of the month. It is calculated by adding the net cash and opening cash for that month
Why Does a Business Prepare a Cash Flow Forecast?
Applying for a Loan
A cash flow forecast can be used to show a bank manager that the business’s finances are properly managed. This is especially important when the business is applying for a loan. The cash flow forecast is an integral part of the business plan
Pay its Bills on time - anticipate a future deficit
It helps businesses identify times of high expenditure and when they may run into a deficit. Therefore, it gives the business plenty of time to arrange a bank overdraft
to deal with this deficit. This ensures that the company can pay its bills on time
and does not go bankrupt.
Control Cash Flow - financial control
The cash flow forecast can eventually be compared to the actual receipts and payments of the business later to see whether the business is on target or off target with its cash flow forecast. This helps the business control its cash flow.
Earn extra Interest- anticipate a future surplus
It lets the business know in advance when it is going to have money left over (surplus). The business can then make plans to invest this money. The business can
earn extra interest by not leaving an unexpected surplus lying around
What are ways that a business can deal with future cashflow deficits
Better Credit Control
Use better credit control methods to make debtors pay up more quickly, such as offering
discounts for early payments, penalties for late payments.
Reduce cash payments by-
Leasing or Hire Purchase
Instead of paying a large amount of cash out in one go to pay for expensive fixed assets (such as a new van), the business can spread the payments out over a longer period by using methods such as hire purchase or leasing
Cutbacks
Reduce payments for expenses by making cutbacks. To lower the wage bill, overtime can be banned. The business might also look at making employees redundant.
Don’t pay out dividends
Reduce cash paid out to shareholders as dividends by offering them free shares in the business instead
What are the limitations of a cashflow forecast?
it doesn’t count for increased costs such as increase in fuel prices, rise in raw materials, or a rise in interest rates
Sales / revenue may fall due to unexpected events such as recession or new
competitors entering the marketplace
Unexpected expenses may arise such as purchasing of new equipment in the event of a machine failure
What are the categories of household budgeting?
Household expenditure
can fall into one of three categories:
Fixed
bills that must be paid every month and the amount stays the same.
E.g. mortgage repayments.
Irregular
bills that must be paid but the amount changes from month to
month. eg Electricity bill.
Discretionary
money that the family does not have to spend. It is optional
How can a household overcome cashflow problems?
Reduce expenditure- decrease cashflow outputs by targeting expenditure and reducing spending
Increase income- A member of the household could work overtime to generate more income
Spread payments- Extra costs for a holiday etc can be paid overtime instead of al at once.
Delay paying bills- You could contact providers like Tv and Phone service providers asking for a delay in paying off the bills so that the money can be spent on something more urgent if money is short. However, THIS COME WITH THE RISK OF BEING CUT OFF OR COULD DAMAGE CREDIT RATINGS.
Seek advice- the bill payers could seek advice from the bank or credit union on how better to budget and also the options for negotiating any loans that they have.
Why would A house hold prepare a budget?
Loan applications
It shows a bank manager that the household’s finances are properly managed. This is especially important when the family is applying for a loan.
Anticipate a future Deficit
It lets the family know in advance when it is going to run short of money (deficit). Therefore, it gives the family plenty of time to arrange a bank overdraft to deal with this deficit. It ensures that the family can pay its bills on time.
Highlight areas of overspending
It shows the family exactly where its money is going and highlights areas of overspending that can be cut back.
What are the types of sources of finance?
Long term, short term and medium term
What is short term finance
(Finance that will take up to one year to repay)
Bank overdraft
Accrued expenses ——- Households
Credit Card
Bank overdraft
Accrued expenses
Trade Credit————- Businesses
Factoring
What is medium term finance
Finance that will take between one to five years to repay)
e.g. van
Hire purchase
Leasing
Personal loan
Hire purchase
Leasing
Term loan
What is long term finance
(Finance that will take more than five years to repay)
e.g. building
Mortgage
Savings———————-Households
Debentures
Retained Earnings
Grants———————– Businesses
Equity Capital
