Section E Break-even and cash flow forecasts Flashcards
define cash flow
money coming in and out of a business
what is a cash flow forecast
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
define opening balance
amount of cash available in a business at the start of a set period
define closing balance
amount of cash available in a business at the end of a set period
what are the benefits of having a positive cash flow? (more money coming in than out)
- can pay suppliers, etc. on time
- new equipment can be bought
- be able to handle unforeseen events
how do you improve your cash flow?
- 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
what are the benefits of cash flow forecasts?
- 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
What are the limitations of cash flow forecasts
- Based only on forecasts and therefore can be inaccurate
- Can take time to do
- Does not take into consideration for unexpected events
Define credit period
The length of time given to customers to pay for goods or services received
define insolvent
When a firm is unable to meet short term cash payments
Give examples of inflows
any of the below:
Cash sales, credit sales, loans, sale of assets, banking interest received, capital introduced
Give examples of outflows
Any of the below:
Cash purchases, credit purchases, rent, rates, salaries, wages, utilities, purchase of assets, value added tax - VAT, bank interest paid
What is the difference between cash surplus and cash deficit
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
Define fixed costs
These are costs that stay the same no matter how many products are made or sold.
Define variable costs
These are costs that change according to how many products are made or sold.
Define semi variable costs
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
Define capital income
Money invested by owners to set up the business
What is a break even
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.
What are benefits of a break even analysis
- 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
What are the limitations of a break even analysis
- 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
Define margin of safety
This is the amount of sales that can fall before the break even point is reached and the business makes no profit.