Learning Outcome E: Break-even and cash flow forecasts Flashcards
1
Q
Cash flow forecast
A
A document that shows the predicted flow of cash into and out of a business over a given period of time, normally 12 months
2
Q
Cash flows into and out of a business on a _______ basis
A
regular
3
Q
What does a cash flow forecast try to predict?
A
What and when cash flows will be in advance
4
Q
True/False: Having a healthy cash flow is crucial to the survival of a business
A
True
5
Q
What does a healthy cash flow mean for a business?
A
It will have enough cash at any one point in time to be able to meet demand for short-term cash outflows
6
Q
By forecasting cash flow in advance, a business can…
A
identify where there might be shortages and either try to prevent this from happening or put plans in place to deal with it
7
Q
Cash inflows or receipts
A
Money coming into the business from various sources
8
Q
Cash sales
A
The customer pays at the time of purchase
9
Q
Credit sales
A
The customer pays in a pre-agreed period after the sale, for example 30 days
10
Q
Loans
A
Bank loans to fund the purchase of assets such as machinery and vehicles
11
Q
Capital introduced
A
Money invested from entrepreneurs or shareholders when a business is first set up or looks to expand
12
Q
Sale of assets
A
The sale of items owned by the business which are no longer needed in order to bring a short-term cash injection into the business
13
Q
Bank interest received
A
Interest paid by the bank on credit balances
14
Q
Cash outflows or payments
A
The money going out of the business for various purposes
15
Q
Cash purchase
A
Items purchased by a business and paid for at the time of purchase
16
Q
Credit purchases
A
Items purchased by a business and paid for at a later point in time
17
Q
Purchase of assets
A
Non-current assets that a business is likely to keep for more than one year such as machinery and vehicles
18
Q
What does VAT stand for?
A
Value Added Tax
19
Q
Business that are VAT registered must pay ___, and this should be…
A
VAT, shown in cash flow forecast
20
Q
Give 4 examples of inflows/receipts
A
Any 4 from cash sales, credit sales, loans, capital introduced, sale of assets and bank interest received
21
Q
Give 6 examples of outflows/payments
A
Any 6 from cash purchase, credit purchases, purchase of assets, VAT, bank interest paid, rent, rates, salaries, wages and utilities
22
Q
Cash sales is an example of an inflow/outflow
A
inflow
23
Q
Credit sales is an example of an inflow/outflow
A
inflow
24
Q
Loans are an example of an inflow/outflow
A
inflow
25
Capital introduced is an example of an inflow/outflow
inflow
26
Sale of assets is an example of an inflow/outflow
inflow
27
Bank interest received is an example of an inflow/outflow
inflow
28
Cash purchase is an example of an inflow/outflow
outflow
29
Credit purchases are an example of an inflow/outflow
outflow
30
Purchase of assets is an example of an inflow/outflow
outflow
31
VAT is an example of an inflow/outflow
outflow
32
Bank interest paid is an example of an inflow/outflow
outflow
33
Rent is an example of an inflow/outflow
outflow
34
Rates are an example of an inflow/outflow
outflow
35
Salaries are an example of an inflow/outflow
outflow
36
Wages are an example of an inflow/outflow
outflow
37
Utilities are an example of an inflow/outflow
outflow
38
A business with sales in excess of the VAT threshold must register itself with ____ and then record...
HMRC, VAT received on sales and paid on purchases.
39
After recording VAT received on sales and paid on purchases a business must then work out...
whether it has paid or received more money in VAT, then claim a refund or make a payment as appropriate
40
What must a business do if it works out that it has paid more money than it has received in VAT?
Claim a refund
41
What must a business do if it works out that it has received more money than it has paid in VAT?
Make a payment
42
Opening balance
The amount of cash available in a business at the start of a set time period, for example a month
43
Closing balance
The amount of cash available in a business at the end of a set time period, for example a month
44
What does a cash flow forecast show?
Opening balance, cash in , cash out and closing balance
45
A cash flow forecast is normally shown on a _______ basis
monthly
46
A cash flow forecast is usually drawn up for how big of a period?
A 12-month period
47
The closing balance at the end of January becomes the opening balance at...
the start of February
48
Credit period
The length of time given to customers to pay for goods or services
49
Credit periods have how many major influences on a business' cash flow?
2
50
The longer a credit period, the...
the slower the money coming in will be
51
A business must consider how long it gives its customers to pay. If it accepts ____ sales only, then this will not be a concern
cash
52
If a greengrocer gives one month's credit for a sale made in January, they will...
not see cash flowing into the business until February
53
True/False: Credit periods affect the ability of a business to gain credit from its suppliers
True
54
If a business can secure supplies on credit what effect will this have on the flow of cash out of a business?
Will slow it down
55
The longer the credit period, the sooner/later the cash flows out
later
56
True/False: Some businesses can secure credit periods of 30, 60 or even 90 days
True
57
If a business both sells on credit to its customers and buys on credit from its suppliers, it needs the first to have a shorter/longer credit period than the second
shorter
58
True/False: The opening balance at the start of the year will be a true reflection of the business' bank balance
True
59
True/False: The closing balance at the end of the year will be a true reflection of the business' bank balance
False, this is based upon predicted incomes and expenditures over the period of the cash flow forecast, normally a year
60
What is the closing balance at the end of a year in a cash flow forecast based upon?
Predicted incomes and expenditures over the period of the cash flow forecast, normally a year
61
One of the key purposes of the cash flow forecast is to highlight, in advance, any...
months where there is a risk of a negative cash flow, as this allows the business to make arrangements such as a prearranged overdraft with the bank or try to take actions to avoid this
62
What may a business want to do if they see there is a month with a risk of a negative cash flow?
Make arrangements such as a prearranged overdraft with the bank, or try to take actions to avoid this
63
A business with a negative closing balance is often said to have _________ problems and is in danger of becoming _________
liquidity, insolvent
64
Liquidity
Measures a firm's ability to meet short-term cash payments
65
Insolvent
When a firm is unable to meet short-term cash payments
66
A cash flow forecast can help to identify where there are potential what?
Shortfalls
67
True/False: A cash flow forecast can indicate where there are large amounts of cash left at the end of a month of year
True
68
True/False: A large amount of cash being left at the end of a month for a business is always a good thing
False, this may be an indication that the business is not taking advantage of opportunities
69
Why should the actual cash flow of a business be monitored alongside a cash flow forecast?
To see if inflows and outflows are as expected, better or worse
70
When do problems occur with cash flows?
When the business's outflows are greater than the opening balance plus the inflows
71
Why is it a problem when a business's outflows are greater than the opening balance plus the inflows?
This will result in a negative closing balance
72
Having a negative closing balance means that a business will not...
have enough cash to meet payments that are due
73
True/False: Most businesses have consistent cash flows throughout the year
False, very few businesses do. They are likely to experience busy and quiet times
74
The cash flow cycle
Fluctuations in the cash flow of a business - as a result of busy and quiet periods
75
Businesses in which industry are likely to have the largest fluctuations in cash flow?
The seasonal industry
76
Someone who owns a small bed and breakfast in a seaside town will have to pay costs like what all year round?
Rent, heat and light, insurance and bank charges, etc.
77
What additional costs to rent, heat and light, insurance, etc. would there be for a small bed and breakfast during season?
Wages and stock
78
Give 2 examples of solutions to cash flow problems that a business can implement
Any 2 from overdraft arrangements, negotiating terms with creditors and reviewing and rescheduling capital expenditure
79
Overdraft arrangements
A business with a fluctuating cash flow cycle should be able to show the forecast to the bank and make arrangements for periods of negative cash flows. Banks sometimes offer free overdraft facilities to help businesses through these periods, but only if pre-agreed. Going overdrawn on a bank account without an agreement with the bank can be a very expensive option
80
A business with a fluctuating cash flow cycle should be able to show the forecast to the bank and...
make arrangements for periods of negative cash flows
81
True/False: Banks sometimes offer free overdraft facilities to help businesses go through periods of cash flow problems
True, but only if pre-agreed
82
What's the drawback of going overdrawn on a bank account without an agreement with the bank?
This can be a very expensive option
83
Negotiating terms with creditors
A business with cash flow problems could try to negotiate a longer payment term with its suppliers, e.g. an increase from 30 days to 60 days in order to slow down the flow of cash out of the business
84
Creditors
Creditors are people or businesses that a business owes money to, normally because goods or services have been bought on credit as opposed to cash purchases
85
What's the downside to negotiating a longer payment term with a creditor?
You may lose any discounts offered for prompt or early repayment
86
Reviewing and rescheduling capital expenditure
Having identified cash flow problems, the owner or manager could review what cash outflows were being spent on. Such a review might identify areas of expenditure that could be cut or postponed. It is difficult to do this if the expenditure is on revenue items - for example, replacement stock - but more achievable if it is capital expenditure. A business could, for example, postpone plans to replace machinery or buy a new van
87
Having identified cash flow problems, the owner or manager could review what cash outflows were being spent on. Such a review might identify areas of expenditure that...
could be cut or postponed
88
It is easier to cut or postpone expenditure of revenue items/capital expenditure
capital expenditure
89
Give an example of capital expenditure that a business may consider cutting or postponing to ensure a healthy cash flow
Any from postpone plans to replace machinery or buy a new van, etc.
90
What is the alternative to buying capital equipment outright?
Leasing it
91
Although leasing capital equipment can prove expensive in the long run, it means that rather than...
paying in one lump sum, the business can pay to use it on a monthly basis
92
Give 3 advantages of cash flow forecasts
Any 3 from encourages planning for cash inflows and outflows, enables cash flow to be monitored and corrective action taken if necessary, can be used as part of a business plan to help raise finance and identifies in advance times of negative closing balances allowing the business to plan for these
93
Give 2 disadvantages of cash flow forecasts
Any 2 from based on forecasts and therefore may be inaccurate, cannot plan for unexpected events such as a rise in the cost of raw materials and time taken to produce a cash flow forecast could have been spent on other tasks
94
Break-even is the point at which a business...
is not making a profit or a loss, i.e. it is just breaking even
95
Break-even is the point at which a business is not making a profit or a loss, i.e. it is just breaking even. This means that money...
being received from sales is the same as the money being spent on costs
96
What are the four categories of costs to a business?
Variable costs, semi-variable costs, fixed costs and total costs
97
Variable costs
Vary with the level of output, for example raw materials
98
Semi-variable costs
Part of the cost stays the same and part varies in relation to the degree business activity, for example a worker may be paid a fixed rate of pay but at busy times earn additional payments for working overtime
99
A worker may be paid a fixed rate of pay but at busy times earn additional payments for working overtime. Which type of cost to a business is this an example of?
Semi-variable
100
Fixed costs
Do not vary with output, for example rent
101
Rent is an example of what type of cost?
Fixed costs
102
Total costs =
fixed costs + variable costs
103
Total revenue
The total amount of money coming coming in from sales, calculated as quantity sold multiplied by selling price
104
Total sales
The amount of sales made in a set time period, for example a year; this can be expressed as value or volume
105
True/False: Total sales can be displayed as value, but not volume
False, total sales can be displayed as value or volume
106
Selling price per unit
The amount a customer pays for each unit bought
107
Sales in value
Sales expressed in monetary value, for example pounds, calculated as quantity sold multiples by selling price per unit
108
Sales in volume
Sales expressed as a quantity, for example tons or units
109
Break-even is the point where total revenue =
total costs
110
How is break even calculated?
Fixed costs / contribution per unit
111
Fixed costs / contribution per unit is the equation for...
break-even point
112
How is contribution unit calculated?
Selling price - variable costs per unit
113
How is total contribution calculated?
Sales revenue - total variable costs
114
How is total variable cost calculated?
Variable cost per unit x quantity or contribution per unit x number of units sold
115
How is contribution per unit calculated?
Selling price - variable costs per unit
116
Sales revenue - total variable costs =
How is total contribution calculated?
117
Variable cost per unit x quantity or contribution per unit x number of units sold =
How is total variable cost calculated?
118
What is margin of safety?
The actual number of units sold over and above the break-even point
119
Margin of safety =
Actual sales in units - break-even level of output
120
Contribution per unit =
selling price - variable costs
121
Break-even point =
fixed costs / contribution per unit, contribution per unit = selling price - variable costs then margin of safety = actual sales - break-even level of output
122
Break-even can be shown on a break-even _____
chart
123
A break-even chart plots the _____ and ________ at each unit of output
costs and revenues
124
On a break-even chart, the break-even point is where the...
total cost line crosses the total revenue line
125
A break-even chart can also be used to calculate...
margin of safety and profit or loss at different levels of output
126
Break-even level of output is the level of output where the business is making...
neither a profit nor a loss
127
If a business sells less than the break-even level of output, then it is...
making a loss
128
For every item sold above the break-even level a business is...
making a profit
129
True/False: Profit and loss can be shown on a break-even chart
True
130
What is contribution per unit used by businesses to do?
Help inform decision making
131
Give 2 examples of benefits of contribution per unit as a decision-making tool
Any 2 from straightforward to calculate, allows for the calculation of break-even level of output, can be used to inform decision, e.g. what price to change and can be used to carry out what-if analysis
132
Give 2 examples of limitations of contribution per unit as a decision-making tool
Any 2 from does not take into account fixed costs, assumes that prices remain constant and does not take into account any unexpected changes to variables, e.g. selling price and variable costs can fluctuate
133
Give 3 things that break-even can be used as a management tool for
Any 3 from planning, monitoring, control and target setting
134
Give 2 examples of how break-even can be used as a management tool for planning
Any 2 from sets budgets for the amount of sales necessary and costs, forms part of a business plan to show at what point the business will start to make a profit and informs pricing decisions
135
Give 2 examples of how break-even can be used as a management tool for monitoring
Any 2 from monitor progress towards achieving break-even point, identify changes to selling price of costs and take corrective action if targets look unlikely to be met
136
Give 2 examples of how break-even can be used as a management tool for control
Any 2 from keeps costs within budget, motivate employees and manage sales account
137
Give 2 examples of how break-even can be used as a management tool for target setting
Any 2 from set sales targets for individual employees, teams or products, set expenditure budgets and set profit budgets based upon sales targets and cost targets
138
Give 4 advantages of break-even
Any 4 from the business knows how many items it must sell in order to break-even, informs decisions on what price to change, can set targets, identifies fixed and variable costs, can identify if costs are too high allowing the business to look for ways of lowering costs, can set targets which will motivate employees and easy way to calculate profit oarless at different levels of output
139
Give 2 disadvantages of break-even
Any 2 from does not take account of variation in costs or selling price, forecast sales may not be achieved and hence, even though the break-even point is known, it may not be achieved and targets set may be too high, creating stress
140
True/False: Break-even informs decisions on what price to charge
True
141
True/False: Break-even does not help in setting targets
False, it does
142
True/False: Break-even identifies fixed and variable costs
True
143
Break-even can identify if costs are too high allowing the business to...
look for ways of lowering costs
144
Break-even can set targets which will do what to employees?
Motivate them
145
Break-even is an easy way to calculate profit or loss at different levels of ______
output
146
True/False: Break-even takes into account variations in costs or selling price
False, it doesn't
147
True/False: Knowing your break-even point guarantees you to break even
False, it does not
148
What are the implications of setting targets too high from a break-even chart?
Stress
