Learning Outcome E Flashcards
Cash sales definition.
The cash immediately received from sales.
Credit sales definition.
Customer has the product but not paid for it in full. Payments are not made until several days/weeks after a product has been purchased.
Loans definition.
Money you borrowed from the bank which comes into account as lump sums.
Capital introduced definition.
Cash from external sources e.g. friends.
When a business owner invests their own money, assets into the business.
Sale of assets definition.
Selling assets owned by the business for cash to then use within the business e.g. property.
bank interest received definition.
Interest paid by the bank on credit balances.
What does a cash flow forecast allow the business to do?
It allows the business to forecast (prediction) the money flowing into the business and the money flowing out of the business for a given period of time (usually a year).
What is a cash flow forecast?
It’s an educated prediction of what the future cash flow may be like. Allows the business to identify times when there may be shortages and plan for this by saving money from where there is surplus.
Cash flow forecasts allow businesses to do :
- Pay its stakeholders.
- Create a document that can be used to help receive funding from potential investors and banks.
- Take corrective action when areas of concern are identified.
What is a cash flow forecast nothing to do with?
Profit or loss.
What are cash purchases?
An outflow.
The buyer pays for goods or services immediately, either at the time of sale or when the product is delivered.
What are credit purchases?
An outflow.
A financial transaction that allows individuals to buy goods or services on credit, essentially deferring the payment to a later date.
What is rent?
An outflow.
A tenants regular payment to a land lord for the use of property or land.
What are rates?
An outflow.
An amount of money that businesses are charged as tax for local services.
What are salaries?
An outflow.
A fixed amount payable at regular intervals, it can be weakly, monthly payments straight to an employee’s bank account.
What are wages?
An outflow.
Hourly or daily payments for work done during the working day.
What are utilities?
An outflow.
A service provided by a public utility e.g. light, power or water.
What is purchase of assets?
An outflow.
Occurs between a seller and a buyer of a company’s assets including facilities, vehicles, equipment, stock and
What does VAT stand for?
Value Added Tax.
What is VAT (Value Added Tax)?
inventory.
A tax added to most products and services sold by VAT - registered businesses.
What is bank interest paid?
The fee a business pays a lender (creditor) to borrow money.
What is the Opening Balance?
How much cash you have at the start of the month.
How do you work out the Opening Balance?
Closing balance of the previous month.
How do you work out Total Inflows?
Add up all inflows.
How do you work out Net Cash Flow?
Total Inflows - Total Outflows.
How do you work out Total Outflows?
Add up all outflows.
What is the Closing Balance?
Amount of cash at the end of the month.
How do you work out the Closing balance?
Net Cash Flow + Opening Balance.
Why is cash flow forecasting important? Provide at least 3 benefits to a business.
- Helps businesses to prevent insolvency.
- Helps businesses to obtain external finances.
- Helps businesses to predict if they can pay employees and suppliers.
What are the 4 uses of a cash flow forecast?
Planning, Monitoring, Control and Target Setting.
How does cash flow forecasting allow Planning?
- Helps identify cash inflows and outflows.
- Help plan when you need external finance (overdraft or loan).
How does cash flow forecasting allow Monitoring?
- Monitor if there is a dip in income.
How does cash flow forecasting allow Control?
- Help limit certain expenses if they are unnecessary.
- Good for setting budgets.
How does cash flow forecasting allow Target Setting?
- Useful for setting future targets.
What does a cash flow forecast not take into account? (A negative of cash flow forecasts)
External factors:
- New competitors.
- Customer wants/preferences.
- Interest Rates.
- Inflation.
What are 3 benefits of cash flow forecasts?
- Can help to avoid overspending.
- Can track inflows and outflows.
- Help plan external sources of finance for the future -
Short term = overdraft
Long term = loan
What are 2 limitations of cash flow forecasts?
- Not 100% accurate as it is a prediction.
- Does not take into account external factors.
While analysing a cash flow forecast, what are 6 possible issues?
- Low inflows.
- High proportion of sales are on credit sales.
- High outflows.
- One off high outflows.
- Negative net cash flow.
- Closing balance is negative.
What is a solution and the risk of the solution for Low Inflows?
Solution & Risk
- Improve advertisement - Increase outflows.
- Reduce Prices - Sales might not increase by % that price has changed (PED).
What is a solution and the risk of the solution for High Proportion Of Sales On Credit Sales?
Solution & Risk
- Interest on credit - Reduces demand.
- Offer a discount to customers if pay in cash (full) - Reduce inflows.
What is a solution and the risk of the solution for High Outflows?
Solution & Risk
- Find a cheaper supplier - Reduce quality - Reduce customer - Reduce Inflows.
- Reduce staff - Decrease productivity.
What is a solution and the risk of the solution for One Of High Outflow?
Solution & Risk
- Take out a loan - Pay interest.
- Hire Purchase - Pay interest.
What is a solution and the risk of the solution for Negative Net Cash Flow?
Solution & Risk
- Increase inflows.
- Decrease Outflows.
What is a solution and the risk of the solution for Negative Closing Balance?
Solution & Risk
- Take out a loan/overdraft - Pay interest.
What is break even?
Profit = 0 & Loss = 0.
When does break even occur?
When income is exactly equal to expenditure.
Variable costs definition:
Costs that vary with the level of output.
What are 3 examples of variable costs:
- Raw materials.
- Stock.
- Wages.
Semi-variable costs definition:
Costs composed of a mixture of both fixed and variable costs.
What is an example of semi-variable costs:
- Phone contract.
Fixed costs definition:
Costs that do not change with the level of output.
What are 4 examples of fixed costs:
- Rent.
- Salaries.
- Insurance.
- Interest on loans.
Total costs definition:
The total costs including fixed, variable and semi-variable costs.
How do you work out total costs?
Fixed Costs + Variable Costs + Semi-Variable Costs
How do you work out Total Revenue?
Selling Price x Quantity Sold
What is the selling price per unit?
Price per item.
How do you work out Sales In Value?
Selling Price x Quantity Sold
What is Sales Revenue the same as?
Sales In Value.
What is Sales In Volume?
Quantity Sold.
A business breaks-even when …
… Total Revenue = Total Costs.
What is the Contribution Per Unit?
Amount by which an individual unit sold exceeds its variable costs.
How do you work out the Contribution Per Unit?
Selling Price - Variable Cost Per Unit
How do you work out the Break-even Point?
Fixed Costs / Contribution Per Unit
What is Margin Of Safety (Units)?
If a business is producing AND selling more than the break-even level of output, then it has a margin of safety.
What is the Margin Of Safety (Units) also called?
The “Safety Net”.
How do you work out the Margin Of Safety (Units)?
Actual Sales In Units x Break-even Level Of Output
How do you work out the Margin Of Safety (Value)?
Margin Of Safety In Actual Units x Selling Price
What are the 6 steps to creating a Break-even Chart?
- Draw axis and label them “costs/sales” on the y axis and “output” on the x axis.
- Plot your fixed costs by putting a horizontal line.
- Plot total costs by starting at the base of the fixed cost line.
- Draw the total revenue line by starting at 0 and increasing upwards for every unit sold until you reach your maximum level of output.
- Identify your break-even point. Total revenue line and total costs line cross.
- Draw a line downwards from where the total revenue and total costs meet down to the output axis. This shows you how many units need to be sold to break-even.
What are the 4 things Break Even is mainly used for?
Planning, Monitoring, Control and Target Setting.
Why is Break Even used for Planning?
- Set budgets.
- Used as part of business plan.
- Used to plan pricing strategies.
Why is Break Even used for Monitoring?
- Monitor progress.
- Monitor changes in revenue and costs = allows businesses to take action and rectify the problem.
- Monitor impact of changes in prices or costs.
Why is Break Even used for Control?
- Control costs to see if they are kept within the budget.
- Control prices so not set to low.
Why is Break Even used for Target Setting?
- Once break-even point is identified, targets can be given to individuals.
- May helps with employees motivation as know how much they need to sell/make.
What are the 7 advantages of using break-even analysis?
- Clear targets show how many items the business needs to sell in order to break-even.
- Informs pricing strategy.
- Makes it clear whether the business is viable.
- Used to set targets as a way to motivate employees.
- Show profit and loss at different levels of output.
- Can help to identify where costs are too high and corrective action can be taken.
- Helps a business get a bank loan/investment.
What are the 5 disadvantages of using
break-even analysis?
- Target setting may be unrealistic and cause stress.
- Assumes all products made are sold = not realistic.
- Costs and/or selling price vary and therefore it will impact the break-even point.
- It assumes one price and one product.
- Not useful for more than one product as only takes into account costs and selling price of one item.
