Outcome E Flashcards
What is a cash flow forecast?
it allows the business to forecast the money flowing in and out of the business for a given period of time.
It allows the business to identify times when there may be shortages and plan for this by saving money from where there is a surplus
It also allows a business to:
Pay it’s stakeholders such as suppliers and employees on time
Create a document that can be used to help receive funding from potential investors and banks
Take corrective actions when areas of concern are identified
Name common inflows
Cash sales
Credit sales
Loans
Capital introduced
Sale of assets
Bank interest received
Cash sales
These are sales made in cash or by card that are received by the seller at the time of purchase or delivery.
Credit sales
Are sales where payments are not made until several days or weeks after the product has been purchased
Loans (what is it for a business)
An inflow for the business as they may require the cash to purchase assets such as equipment, vehicle or machinery
Capital introduced (BO)
When a business owner invests their personal money, stock or assets into the business. This is most common when a business starts or is expanding
Sale of assets ( is a method of what?)
This is a method of increasing inflows to the business by selling assets owned by the business for cash to then use within the business
Bank interest
This is interest paid by the bank on credit balances
Common outflows the business may have are:
Cash purchases
Credit purchases
Rent
Rates
Salaries
Wages
Utilities
Purchase of assets
Value added tax
Bank interest paid
Cash purchases
are items that the business purchases and pays for them at the time of purchase
Credit purchases
Items that have been bought by a business but then paid for at a later date. A business may purchase a new machine 30 days later pay the amount charged for the machine. Whereas if this was a cash purchase the amount would be paid immediately
Rent
This is a regular payment made to a landlord usually I’m exchange for the use of a premises
Rates
Business rates are a tax on property used for business purposes. They’re changed on properties like offices, shops, pubs and warehouses. Most non - domestic properties will attract business rates.
Salaries
A fixed regular payment to an employee. they are usually paid on a monthly basis but often expressed as an annual sum, made by an employer to an employee, especially in professional industries
Wages
Wages are similar to salary however a wage is usually based on hours worked. Whereas a salary is a fixed rate for the year
Utilities
Includes your electricity, gas and water usage and costs. It can also include bills for essential services such as those provided by the council, like sewer services such as cable tv or mobile phones are not considered to be utility bills
Purchase of assets
Refers to the purchase of non current assets that a business is likely to keep for more than a year such as vehicles, machinery, land and property
VAT
Businesses that are VAT registered must pay VAT to HMRC. This payment should be shown on a cash flow forecast
Bank interest paid
An interest that is incurred due to borrowing money is also an outflow
Total cash available formula
Opening balance plus Total inflows
Closing balance formula
Total cash available minus total outflows
Ways to improve cash flow
Reduce unnecessary expense
Sell debts to debt factor agency
Encourage suppliers to offer extended credit
Request extension of bank overdraft
Sell and leaseback assets
Encourage debtors to pay quicker
Set targets to avoid cash flow issues
Advantages of a cash flow
Help the business predict when they might have cash flow problems
If the business has predicted and planned for its financial needs then banks may extend overdrafts or offer loans
Limitations of cash flow
Cash flows fail to consider that a business can delay payments to increase their net cash inflows and that it can buy using a leasing arrangement to avoid using cash
What are the uses for a cash flow forecast
Planning
Monitoring
Control
Target setting
Planning
A cash flow forecast can be used as a planning tool to see what the business’ inflows and outflows are. It can then be used to put a plan in place to either utilise cash surpluses or manage months were their cash flow is negative.
It helps identify where most of your inflows and outflows are coming from. Where these are not adequate it allows the business to put a plan in place to help rectify any cash flow issues
Monitoring
A cash flow forecast needs to be monitored closely in line with the actual cash flow of the business
Control
When areas of concern occur the business can then try to control this by attempting to increase inflows or decrease outflows. Without the cash flow forecast the business would not be able to control any cash flow issues until they had occurred
Solutions to cash flow problems
Overdraft arrangements
Negotiating terms with creditors
Reviewing and rescheduling capital expenditure
Advantages of cash flow forecast
Allows the business to track inflows and outflows - By monitoring cash inflows (e.g., sales revenue, loans) and outflows (e.g., operational costs, supplier payments), businesses can plan their finances more effectively
Can be used as part of a business plan to help secure finance - Providing a detailed and realistic cash flow forecast as part of a business plan builds trust and confidence with potential financiers
Track whether actual spending is close to your cash flow forecast - Helps you clearly see if your staying within your budget and planned cash flow
Disadvantages of cash flow forecast
Based on a forecast therefore could not be accurate - Cash flow forecasts rely on predictions about future income and expenses, which may not align with actual outcomes
Sales are significantly lower than expected - Lower sales may hinder the business’s ability to repay loans or meet other financial commitments on time
Takes time to produce - Cash flow forecasts must be updated frequently to remain accurate, requiring ongoing time and resources
What is break even
Occurs when income is exactly equal to expenditure, showing neither profit nor loss
In other words, profit = 0 & loss = 0
Costs can be categorised in the following ways:
Variable costs
Fixed costs
Semi - variable costs
Total costs
Variable costs
Costs that vary with the level of output. For example, raw materials. The more products a business makes the higher the cost of raw materials will be. If the business makes one product the cost of raw material will be significantly lower than if 1 million products were made
Fixed costs
Do not vary with the level of output. For example, regardless of how many items a business produces they will still need to pay the same amount of rent for their premises
Semi variable cost
These costs are composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this level is exceeded.
An example of a semi - variable costs would be a mobile phone contract. There is a fixed fee of say £50 a month for so many minutes, texts and data. Whether you used 10 mins or 100 mins this fixed fee is charged. However, if you exceed your minutes, text or data limit you will be charged a variable fee on top of this fixed rate. This is therefore a semi variable cost
Total costs - formula
The total amount of your fixed and variable costs added together
Fixed costs + variable costs
Sales can be categorised in the following ways
Total revenue
Selling price per unit
Sales in value
Sales in volume
Total revenue
The total amount of money coming into the business from the sale of its products and services. It is the quantity sold multiples by the
selling price.
Selling price per unit
The amount a customer pays per unit bought
Sales in value
This is the total amount of sales made expresses as a monetary value such as ‘£’
Sales in volume
The amount of sales expressed as a quantity
Break even point occurs when
Total revenue = total costs
Total revenue formula
Quantity sold x selling price
Total costs formula
Fixed costs + variable costs
Contribution per unit formula
Selling price - variable cost per unit
Break even formula
Fixed costs divided by contribution per unit
Margin of safety formula
Actual sales in units - break even level of output
Margin of safety in value formula
Margin of safety in units x selling price
To calculate profit you can do one of two things
Multiply the contribution per unit by the margin for safety in units
Or
Total contribution of all units sold minus fixed costs
Break even can be used as a management tool to do the following
Planning
Monitoring
Control
Target setting
Planning
Set budgets so that the break even point is not obstructed by costs. Can be used as part of a business plan to demonstrate to lenders what point the business will break even and their capacity for profit. Can be used to plan pricing strategies as the price cam impact the break even point either positively or negatively
Monitoring
Monitor the impact of changing prices or changes in costs. By monitoring the changes in revenue and costs it allows the business to take action and rectify the problem.
Control
Use break even to control costs and see if they are being kept within budget. Motivate employees to achieve targets that have been set and controlled based on the break even point. Control pricing and ensure discounts given do not hinder progress to break even.
Target setting
Once the break even point is identified targets can be given to individuals, that are calculated to ensure the break even point is met. Set targets based on expenditure so that expenditure does not impact progress towards break even. Set production targets that will enable certain level of profit to be made once the break even point has been reached.
Advantages of break even
Quick, simple and aids decision making
Predicts the level of risk and margin of safety
Shows how many units need to be sold before a profit is made
Clear target of how many items the business needs to sell to break even
Informs pricing strategy
Easy to set targets
Can be used to set targets as a way to motivate employees
Shows profit and loss at different levels of output
Can help identify where costs are too high and corrective action can be taken
Clearly shows fixed and variable costs
Disadvantages of break even
It’s only a forecast
Assumes all products are made and sold
Target setting may be unrealistic and cause stress
The forecast in sales may not be achieved and therefore the break even point never reached.
It costs or selling price vary even slightly it will impact the break even point
Not ideal for a service as services tend to fluctuate in price
Not useful for more than one product as it only takes into account the costs and selling price of one item
