Section E - Break-even and cash flow forecasts Flashcards
A healthy cash flow means…
A business will have enough cash at any one point in time to be able to meet demand for short-term cash outflows.
By forecasting cash flow in advance, a business can…
identify where there might be shortages and either try to prevent this from happening or put plans in place to deal with it.
What are cash inflows or receipts?
Are the money coming into the business from various sources.
What are the sources of cash inflows or receipts?
Cash sale Credit sales Loans Capital introduced Sale of assets Bank interested received
What is capital introduced?
Money invested from entrepreneurs or shareholders when a business is first set up or looks to expand
What is outflows/payments?
Are the money going out of the business for various purposes.
What are the sources of outflows/payments?
Cash purchase Credit purchases Purchases of assets Value added tax Bank interest paid Rent Rates Salaries Wages Utilities
What is value added tax
Businesses that are VAT registered must pay VAT to HM revenue & Customers, and this should be shown in the cash forecast.
What is the VAT threshold as of 2015?
£82,000
What happens if a business with sales in excess of the VAT threshold.
They must registers itself with HMRC and then record VAT received on sales and paid on purchases. A business must then work out whether it has paid or received more money in VAT, then claim a refund or make a payment as appropriate.
What is the formula to calculate the closing balance?
Opening balance + Cash inflows - Cash outflows = Closing balance
What do credit periods affect in a business?
Credit periods affect the ability of the business to gain credit from its suppliers. If a business can secure supplies on credit, then this will slow down the flow of cash out of a business. The longer the credit period, the later the cash flows out.
What is the key purpose of a cash flow forecast.
Is to highlight in advance any months where there is a risk of a negative cash flow, as this allows the business to make arrangements.
A cash flow forecast can help identify…
Where there are potential shortfalls but might also indicate where there are large amounts of cash left at the end of a month or year.
What is a problem that occurs with cash flow.
Problems occur with cash flows when the business’s outflows are greater than the opening balance plus the inflows, as this will result in a negative closing balance. This means that the business will not have enough cash to meet payments that are due.
What are some solutions to cash flow problems?
1) Overdraft arrangements
2) Negotiating terms with creditors
3) Reviewing and rescheduling capital expenditure
Explain overdraft arrangements
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 flow.
What are creditors?
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.
Explain negotiating terms with creditors.
A business with cash flow problems could try negotiate a longer payment term with its suppliers
Explain reviewing and rescheduling capital expenditure.
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.
