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Personal and Business Finance > Learning Outcome E: Break-even and cash flow forecasts > Flashcards

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

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2
Q

Cash flows into and out of a business on a _______ basis

A

regular

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3
Q

What does a cash flow forecast try to predict?

A

What and when cash flows will be in advance

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4
Q

True/False: Having a healthy cash flow is crucial to the survival of a business

A

True

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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

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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

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7
Q

Cash inflows or receipts

A

Money coming into the business from various sources

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8
Q

Cash sales

A

The customer pays at the time of purchase

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9
Q

Credit sales

A

The customer pays in a pre-agreed period after the sale, for example 30 days

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10
Q

Loans

A

Bank loans to fund the purchase of assets such as machinery and vehicles

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11
Q

Capital introduced

A

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

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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

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13
Q

Bank interest received

A

Interest paid by the bank on credit balances

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14
Q

Cash outflows or payments

A

The money going out of the business for various purposes

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15
Q

Cash purchase

A

Items purchased by a business and paid for at the time of purchase

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16
Q

Credit purchases

A

Items purchased by a business and paid for at a later point in time

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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

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18
Q

What does VAT stand for?

A

Value Added Tax

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19
Q

Business that are VAT registered must pay ___, and this should be…

A

VAT, shown in cash flow forecast

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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

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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

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22
Q

Cash sales is an example of an inflow/outflow

A

inflow

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23
Q

Credit sales is an example of an inflow/outflow

A

inflow

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24
Q

Loans are an example of an inflow/outflow

A

inflow

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25
Q

Capital introduced is an example of an inflow/outflow

A

inflow

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26
Q

Sale of assets is an example of an inflow/outflow

A

inflow

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27
Q

Bank interest received is an example of an inflow/outflow

A

inflow

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28
Q

Cash purchase is an example of an inflow/outflow

A

outflow

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29
Q

Credit purchases are an example of an inflow/outflow

A

outflow

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30
Q

Purchase of assets is an example of an inflow/outflow

A

outflow

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31
Q

VAT is an example of an inflow/outflow

A

outflow

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32
Q

Bank interest paid is an example of an inflow/outflow

A

outflow

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33
Q

Rent is an example of an inflow/outflow

A

outflow

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34
Q

Rates are an example of an inflow/outflow

A

outflow

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35
Q

Salaries are an example of an inflow/outflow

A

outflow

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36
Q

Wages are an example of an inflow/outflow

A

outflow

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37
Q

Utilities are an example of an inflow/outflow

A

outflow

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38
Q

A business with sales in excess of the VAT threshold must register itself with ____ and then record…

A

HMRC, VAT received on sales and paid on purchases.

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39
Q

After recording VAT received on sales and paid on purchases a business must then work out…

A

whether it has paid or received more money in VAT, then claim a refund or make a payment as appropriate

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40
Q

What must a business do if it works out that it has paid more money than it has received in VAT?

A

Claim a refund

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41
Q

What must a business do if it works out that it has received more money than it has paid in VAT?

A

Make a payment

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42
Q

Opening balance

A

The amount of cash available in a business at the start of a set time period, for example a month

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43
Q

Closing balance

A

The amount of cash available in a business at the end of a set time period, for example a month

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44
Q

What does a cash flow forecast show?

A

Opening balance, cash in , cash out and closing balance

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45
Q

A cash flow forecast is normally shown on a _______ basis

A

monthly

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46
Q

A cash flow forecast is usually drawn up for how big of a period?

A

A 12-month period

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47
Q

The closing balance at the end of January becomes the opening balance at…

A

the start of February

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48
Q

Credit period

A

The length of time given to customers to pay for goods or services

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49
Q

Credit periods have how many major influences on a business’ cash flow?

A

2

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50
Q

The longer a credit period, the…

A

the slower the money coming in will be

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51
Q

A business must consider how long it gives its customers to pay. If it accepts ____ sales only, then this will not be a concern

A

cash

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52
Q

If a greengrocer gives one month’s credit for a sale made in January, they will…

A

not see cash flowing into the business until February

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53
Q

True/False: Credit periods affect the ability of a business to gain credit from its suppliers

A

True

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54
Q

If a business can secure supplies on credit what effect will this have on the flow of cash out of a business?

A

Will slow it down

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55
Q

The longer the credit period, the sooner/later the cash flows out

A

later

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56
Q

True/False: Some businesses can secure credit periods of 30, 60 or even 90 days

A

True

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57
Q

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

A

shorter

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58
Q

True/False: The opening balance at the start of the year will be a true reflection of the business’ bank balance

A

True

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59
Q

True/False: The closing balance at the end of the year will be a true reflection of the business’ bank balance

A

False, this is based upon predicted incomes and expenditures over the period of the cash flow forecast, normally a year

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60
Q

What is the closing balance at the end of a year in a cash flow forecast based upon?

A

Predicted incomes and expenditures over the period of the cash flow forecast, normally a year

61
Q

One of the key purposes of the cash flow forecast is to highlight, in advance, any…

A

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
Q

What may a business want to do if they see there is a month with a risk of a negative cash flow?

A

Make arrangements such as a prearranged overdraft with the bank, or try to take actions to avoid this

63
Q

A business with a negative closing balance is often said to have _________ problems and is in danger of becoming _________

A

liquidity, insolvent

64
Q

Liquidity

A

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

65
Q

Insolvent

A

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

66
Q

A cash flow forecast can help to identify where there are potential what?

A

Shortfalls

67
Q

True/False: A cash flow forecast can indicate where there are large amounts of cash left at the end of a month of year

A

True

68
Q

True/False: A large amount of cash being left at the end of a month for a business is always a good thing

A

False, this may be an indication that the business is not taking advantage of opportunities

69
Q

Why should the actual cash flow of a business be monitored alongside a cash flow forecast?

A

To see if inflows and outflows are as expected, better or worse

70
Q

When do problems occur with cash flows?

A

When the business’s outflows are greater than the opening balance plus the inflows

71
Q

Why is it a problem when a business’s outflows are greater than the opening balance plus the inflows?

A

This will result in a negative closing balance

72
Q

Having a negative closing balance means that a business will not…

A

have enough cash to meet payments that are due

73
Q

True/False: Most businesses have consistent cash flows throughout the year

A

False, very few businesses do. They are likely to experience busy and quiet times

74
Q

The cash flow cycle

A

Fluctuations in the cash flow of a business - as a result of busy and quiet periods

75
Q

Businesses in which industry are likely to have the largest fluctuations in cash flow?

A

The seasonal industry

76
Q

Someone who owns a small bed and breakfast in a seaside town will have to pay costs like what all year round?

A

Rent, heat and light, insurance and bank charges, etc.

77
Q

What additional costs to rent, heat and light, insurance, etc. would there be for a small bed and breakfast during season?

A

Wages and stock

78
Q

Give 2 examples of solutions to cash flow problems that a business can implement

A

Any 2 from overdraft arrangements, negotiating terms with creditors and reviewing and rescheduling capital expenditure

79
Q

Overdraft arrangements

A

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
Q

A business with a fluctuating cash flow cycle should be able to show the forecast to the bank and…

A

make arrangements for periods of negative cash flows

81
Q

True/False: Banks sometimes offer free overdraft facilities to help businesses go through periods of cash flow problems

A

True, but only if pre-agreed

82
Q

What’s the drawback of going overdrawn on a bank account without an agreement with the bank?

A

This can be a very expensive option

83
Q

Negotiating terms with creditors

A

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
Q

Creditors

A

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
Q

What’s the downside to negotiating a longer payment term with a creditor?

A

You may lose any discounts offered for prompt or early repayment

86
Q

Reviewing and rescheduling capital expenditure

A

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
Q

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…

A

could be cut or postponed

88
Q

It is easier to cut or postpone expenditure of revenue items/capital expenditure

A

capital expenditure

89
Q

Give an example of capital expenditure that a business may consider cutting or postponing to ensure a healthy cash flow

A

Any from postpone plans to replace machinery or buy a new van, etc.

90
Q

What is the alternative to buying capital equipment outright?

A

Leasing it

91
Q

Although leasing capital equipment can prove expensive in the long run, it means that rather than…

A

paying in one lump sum, the business can pay to use it on a monthly basis

92
Q

Give 3 advantages of cash flow forecasts

A

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
Q

Give 2 disadvantages of cash flow forecasts

A

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
Q

Break-even is the point at which a business…

A

is not making a profit or a loss, i.e. it is just breaking even

95
Q

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…

A

being received from sales is the same as the money being spent on costs

96
Q

What are the four categories of costs to a business?

A

Variable costs, semi-variable costs, fixed costs and total costs

97
Q

Variable costs

A

Vary with the level of output, for example raw materials

98
Q

Semi-variable costs

A

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
Q

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?

A

Semi-variable

100
Q

Fixed costs

A

Do not vary with output, for example rent

101
Q

Rent is an example of what type of cost?

A

Fixed costs

102
Q

Total costs =

A

fixed costs + variable costs

103
Q

Total revenue

A

The total amount of money coming coming in from sales, calculated as quantity sold multiplied by selling price

104
Q

Total sales

A

The amount of sales made in a set time period, for example a year; this can be expressed as value or volume

105
Q

True/False: Total sales can be displayed as value, but not volume

A

False, total sales can be displayed as value or volume

106
Q

Selling price per unit

A

The amount a customer pays for each unit bought

107
Q

Sales in value

A

Sales expressed in monetary value, for example pounds, calculated as quantity sold multiples by selling price per unit

108
Q

Sales in volume

A

Sales expressed as a quantity, for example tons or units

109
Q

Break-even is the point where total revenue =

A

total costs

110
Q

How is break even calculated?

A

Fixed costs / contribution per unit

111
Q

Fixed costs / contribution per unit is the equation for…

A

break-even point

112
Q

How is contribution unit calculated?

A

Selling price - variable costs per unit

113
Q

How is total contribution calculated?

A

Sales revenue - total variable costs

114
Q

How is total variable cost calculated?

A

Variable cost per unit x quantity or contribution per unit x number of units sold

115
Q

How is contribution per unit calculated?

A

Selling price - variable costs per unit

116
Q

Sales revenue - total variable costs =

A

How is total contribution calculated?

117
Q

Variable cost per unit x quantity or contribution per unit x number of units sold =

A

How is total variable cost calculated?

118
Q

What is margin of safety?

A

The actual number of units sold over and above the break-even point

119
Q

Margin of safety =

A

Actual sales in units - break-even level of output

120
Q

Contribution per unit =

A

selling price - variable costs

121
Q

Break-even point =

A

fixed costs / contribution per unit, contribution per unit = selling price - variable costs then margin of safety = actual sales - break-even level of output

122
Q

Break-even can be shown on a break-even _____

A

chart

123
Q

A break-even chart plots the _____ and ________ at each unit of output

A

costs and revenues

124
Q

On a break-even chart, the break-even point is where the…

A

total cost line crosses the total revenue line

125
Q

A break-even chart can also be used to calculate…

A

margin of safety and profit or loss at different levels of output

126
Q

Break-even level of output is the level of output where the business is making…

A

neither a profit nor a loss

127
Q

If a business sells less than the break-even level of output, then it is…

A

making a loss

128
Q

For every item sold above the break-even level a business is…

A

making a profit

129
Q

True/False: Profit and loss can be shown on a break-even chart

A

True

130
Q

What is contribution per unit used by businesses to do?

A

Help inform decision making

131
Q

Give 2 examples of benefits of contribution per unit as a decision-making tool

A

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
Q

Give 2 examples of limitations of contribution per unit as a decision-making tool

A

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
Q

Give 3 things that break-even can be used as a management tool for

A

Any 3 from planning, monitoring, control and target setting

134
Q

Give 2 examples of how break-even can be used as a management tool for planning

A

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
Q

Give 2 examples of how break-even can be used as a management tool for monitoring

A

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
Q

Give 2 examples of how break-even can be used as a management tool for control

A

Any 2 from keeps costs within budget, motivate employees and manage sales account

137
Q

Give 2 examples of how break-even can be used as a management tool for target setting

A

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
Q

Give 4 advantages of break-even

A

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
Q

Give 2 disadvantages of break-even

A

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
Q

True/False: Break-even informs decisions on what price to charge

A

True

141
Q

True/False: Break-even does not help in setting targets

A

False, it does

142
Q

True/False: Break-even identifies fixed and variable costs

A

True

143
Q

Break-even can identify if costs are too high allowing the business to…

A

look for ways of lowering costs

144
Q

Break-even can set targets which will do what to employees?

A

Motivate them

145
Q

Break-even is an easy way to calculate profit or loss at different levels of ______

A

output

146
Q

True/False: Break-even takes into account variations in costs or selling price

A

False, it doesn’t

147
Q

True/False: Knowing your break-even point guarantees you to break even

A

False, it does not

148
Q

What are the implications of setting targets too high from a break-even chart?

A

Stress

Personal and Business Finance (6 decks)

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