Section E Break-even and cash flow forecasts

Question 1

define cash flow

Answer 1

money coming in and out of a business

Question 2

what is a cash flow forecast

Answer 2

A document that shows the predicted flow of cash into and out of a business over a given period of time, that is usually twelve months

Question 3

define opening balance

Answer 3

amount of cash available in a business at the start of a set period

Question 4

define closing balance

Answer 4

amount of cash available in a business at the end of a set period

Question 5

what are the benefits of having a positive cash flow? (more money coming in than out)

Answer 5

• can pay suppliers, etc. on time
• new equipment can be bought
• be able to handle unforeseen events

Question 6

how do you improve your cash flow?

Answer 6

• reschedule payments
• increase cash inflows eg. increase selling price or decrease marketing
• decrease cash outflows eg. destock, or negotiate cheaper deals
• sources of finance eg. loan or overdraft

Question 7

what are the benefits of cash flow forecasts?

Answer 7

• can give the business an idea if any changes need to be made
• encourages planning of inflows and outflows
• shows whether your business is meeting your expectations
• can be used as a business plan to help raise finance
• allows cashflow to be monitored

Question 8

What are the limitations of cash flow forecasts

Answer 8

• Based only on forecasts and therefore can be inaccurate
• Can take time to do
• Does not take into consideration for unexpected events

Question 9

Define credit period

Answer 9

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

Question 10

define insolvent

Answer 10

When a firm is unable to meet short term cash payments

Question 11

Give examples of inflows

Answer 11

any of the below:
Cash sales, credit sales, loans, sale of assets, banking interest received, capital introduced

Question 12

Give examples of outflows

Answer 12

Any of the below:
Cash purchases, credit purchases, rent, rates, salaries, wages, utilities, purchase of assets, value added tax - VAT, bank interest paid

Question 13

What is the difference between cash surplus and cash deficit

Answer 13

Cash surplus is having extra cash in the business than is needed

cash deficit is not having enough cash in the business to pay expenditure

Question 14

Define fixed costs

Answer 14

These are costs that stay the same no matter how many products are made or sold.

Question 15

Define variable costs

Answer 15

These are costs that change according to how many products are made or sold.

Question 16

Define semi variable costs

Answer 16

These are costs where part of the cost stays the same and part varies in relation to the degree of business activity

For example, a worker paid over time

Question 17

Define capital income

Answer 17

Money invested by owners to set up the business

Question 18

What is a break even

Answer 18

Break even is the point at which revenue and total costs are the same, meaning the business is making neither a profit or a loss.

Question 19

What are benefits of a break even analysis

Answer 19

• The business can analyse costs to see if any are too high and can be reduced
• The business knows the fixed and variable costs linked to a product
• The business can set the best price for the product
• It allows the business to set a margin of safety

Question 20

What are the limitations of a break even analysis

Answer 20

• It is not always possible to accurately predict the total costs because they change
• It is not always possible to accurately predict sales figures and therefore potential revenue

Question 21

Define margin of safety

Answer 21

This is the amount of sales that can fall before the break even point is reached and the business makes no profit.