Planning and cash flow 2.1.4 Flashcards
what is cash flow
the flow of money in and out of a business over a given time period
why is having a business plan important to help raise finance
to help persuade outside investors that if they lend money, the business will not collapse and the money will not be lost
what is competitive advantage
a factor that gives you an edge over your rivals (e.g. being cheaper of better quality)
what should a business plan outline and include
it should outline the firm’s source of competitive advantage and include the business model, product and market positioning, operational plan, investment requirement, key opportunities, and financial forecasts (including cash flows)
why is cash flow important to a business
it needs to ensure a positive cash balance in order to meet day to day expensive
what are 3 benefits of a cash flow forecast
- advanced warning of cash shortages
- ensures that the business can pay suppliers and employees
- provides reassurance to investors and lenders
definition of cash flow forecast
a forward-looking statement that tries to predict cash inflows and outflows in the future
definition of a cash slow statement
a backward looking statement that shows what happened to the business’s cash inflows and outflows in the past
what is net cash flow
the difference between cash inflow and outflow (inflow-outflow)
give 3 examples of cash inflows
- owner’s investment
- debtor payments
- bank loans
give 3 examples of cash outflows
- payment of fixed costs
- payment of variable costs
- unforeseen expenses (machine breaking, for example)
what is the opening balance
how much money the business has at the start of each month (the closing balance for 1 month becomes the opening balance for the next)
what is the closing balance
how much money a business has at the end of the month
how to calculate closing balance
opening balance + net cash flow
how can you tell that a business is growing and improving through a cash flow
the closing balance increases over time
give the 6 most common cash flow problems
- low profits
- too much production capacity
- excess inventories held
- allowing customers too much credit and giving them too long to pay
- growing the business too fast and overtrading
- does not account for seasonal demand
how to improve cash flow
- create a policy on how much credit can be given, and offer cash discounts to prompt payers
- sell debtors to a third party to generate cash
- use trade credit so the business can retain cash for longer
- don’t stockhold: control stock and keep smaller balances to improve efficiency
